There were signs we were reaching a tipping point this week, with equities remaining buoyant despite the continuation of high bond yields. Historically, high treasury yields and prosperity on the stock market usually don’t go well together, so there was a feeling that something had to give. So, ‘enter’ the latest US job openings data and consumer confidence indicator, which both missed the mark on the low side and in doing so raised questions about whether the Fed does indeed have another 25bp hike left in them. This is what created the latest turn in the market.
Disappointing US macro data essentially ‘let the air out of the balloon’ in terms of treasury yields. The 10-year and 2-year treasury yields had been holding up well with Jerome Powell keeping the option of further interest rate tightening on the cards following Jackson Hole. But it seems that markets were searching for reasons which may be used to justify the scenario of no further hikes from here.
And while the job openings and consumer confidence data were undoubtedly on the soft side, there is even more critical data points yet to come this week. GDP, Core PCE Price Index and NFP data are all on deck, so there is still ample opportunity for perhaps another repricing of interest rate expectations should any of these key data points produce a beat to the upside.
With US bond yields losing steam and the greenback dropping accordingly, gold was quick to capitalise. Spot gold has created a buffer above the $1900 level, having jumped to $1936 and is now sitting on the cusp of the next key resistance level around $1946. The DXY felt the brunt of the softer US data and the corresponding move lower in yields. The Dollar Index had been trading just above the 104 level but sunk to 103.50. This fall in the USD after a period of strength allowed other currencies to finally make some forward-progress, with the Euro, GBP and AUD all registering substantial gains against the Dollar.
In the case of the AUD, it did give back some gains today however with Australian CPI coming in at 4.9%, which was lower than the 5.2% figure expected and the 5.4% prior reading. While the RBA will be pleased to see inflation heading in the right direction, it remains well above the 2-3% target band and as such further tightening from the Australian central bank still cannot be ruled out.
Elsewhere, oil was another asset which moved higher courtesy of a pullback in the USD. The WTI contract pushed back above the $80 level and was last seen trading at $81.30 during the Asian session. Risk assets (including oil) have been encouraged from signals out of China that we could soon see a further lowering on key lending rates to try and bolster economic activity. Investors are still watching the situation in China closely both in terms of stimulus attempts and the latest macro indicators. Chinese PMI data is due on Thursday (manufacturing and non-manufacturing), and markets will be paying close attention to which side of the key ‘50’ level the numbers come in at (a reading above 50 indicates expansion, below 50 indicates contraction).
Overall, it’s been a risk-on kind of day across equity markets. However, with some crucial data points from China and the US yet to come this week we could see some further shifting of sentiment before the week is out.