Market Strategist
Summary: King dollar remains heavily in demand, being the only relief in portfolios with both equities and bonds down. Momentum is likely to continue until US economic data or events signal risks to spending into Q4. We highlight the "Three S" risks stacking up into next week coming from student loan repayments, strikes and shutdown. These could make Gold outperform, but any hit to the USD will remain temporary for now. EUR and JPY face a double whammy of risks from USD strength and rising oil prices, while CAD outperformance continues.
The Fed’s higher-for-longer message is continuing to reverberate through the markets, and US 10-year Treasury yields have now climbed above 4.5% for the first time since 2007. That is weighing on risk assets, and as a result, the shift in inflation regime has come back to haunt asset allocators, questioning once again the relevance of the 60-40 portfolios. In this scenario, cash remains king and exposure to the US dollar remains key to hedge the downside risks in portfolios. Higher yields, US resilience and quarter-end flows can continue to support the dollar this week, but risks are seen increasing into October.
This week is light on data but heavy on event risks. Today’s consumer confidence data could be key in the US as higher gasoline prices along with high borrowing costs and increasing spending concerns could weigh. August consumer confidence plunged to 106.1 from July’s 114 as consumers’ assessment of the labor market deteriorated. Entertainment spending should also have started to taper into September and Bloomberg consensus expects US consumer confidence to plunge further to 105.5.
Still, clear deterioration in data may only start to come after all the September data has been reported and there may be some more room for USD strength to sustain. This week’s event risks, however, remain key to monitor and could bring some bumps. An adverse outcome could also risk a fast forward to stagflation concerns, and disrupt the USD rally momentarily. ‘Three S’ risks are lining up – including the student loan repayments that restart in October, the autoworker strikes that are now encompassing the supplier networks, and a potential government shutdown.
Federal student loan repayments are set to restart on October 1 after having been suspended since March 2020, and Moody’s estimates that 24 million borrowers will owe an average of $275 per month. This could curtail consumer spending, especially when pandemic-era savings are being exhausted. Meanwhile, the widening United Auto Worker (UAW) strikes against GM and Stellantis risk dampening US industrial output and could result in higher car prices, suggesting stagflation risks. Lastly, a US shutdown could arrive into the coming weekend if Congress fails to provide funding for the fiscal year starting October 1. This could mean thousands of federal workers may be furloughed without pay, again highlighting spending cut risks if the shutdown is prolonged.
While direct economic impact from strikes or shutdown could be limited, sentiment could turn around quickly with all these risks stacking up into the beginning of Q4. Dollar still remains attractive from a safe-haven perspective, given the cratering in yen and Swiss franc, however some consolidation may be likely with net positioning in the dollar also turning to a long after eight weeks. A look at previous shutdown from December 2018-Janauary 2019 showed that dollar declined for four consecutive weeks before gains returned when the resolution was reached. Gold could outperform on safe-haven demand, while sustained gains in oil prices could underpin CAD. If a shutdown is averted, USD bulls could come back stronger.
Eurozone’s PMIs were mixed on Friday with German economy seemingly at a turnaround but France slipping further. Overall, Eurozone PMIs remained in contraction, signalling risks for Q3 GDP. Germany’s Ifo also showed a marginal improvement, but remained insufficient to spark optimism. Focus is on monthly credit data due Wednesday and flash CPI later this week, and soft numbers could continue to put emphasis on peak ECB rates, bringing EUR downside. Break of key support at 1.0635 in EURUSD has opened the doors to 1.05.
Meanwhile, higher Treasury yields and oil prices continue to push the Japanese yen lower. USDJPY was at fresh 11-month highs, and is testing the 149 handle with verbal intervention remaining lacklustre. Near-term risks is seen at the 150 handle with any real intervention potentially bringing the pair lower towards 145 temporarily but unlikely to reverse the weakness of the yen in any material way.
Bond. Long Bond(s)
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Charu Chanana,
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Peter Garnry,
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With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
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Redmond Wong,
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The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
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