Dollar Firm as UST Yields March Higher

October 29, 2024

Win Thin

The dollar remains firm as UST yields march higher; September JOLTS data will be the data highlight; October Conference Board consumer confidence will also be reported; U.S. growth remains robust
U.K. yields remain elevated on the prospects of greater gilt issuance ahead; U.K. BRC reported soft October shop prices; Germany reported November GfK consumer confidence; Sweden GDP unexpectedly contracted in Q3
Japan Finance Minister Kato issued the boilerplate warning on FX; Japan reported solid September labor market data; China may issue over CNY10 trln of extra debt in the next few years

The dollar remains firm as UST yields march higher. DXY is trading flat near 104.340 after making a new high for this move yesterday near 104.573. It remains on track to test the July 30 high near 104.799. USD/JPY is trading higher near 153.50 despite official jawboning (see below). The euro is trading lower near $1.0805 while sterling is trading higher near $1.2985. The strong U.S. fundamental story continues to favor higher UST yields and a higher dollar. Today’s JOLTS data and Conference Board consumer confidence should show that the labor market remains firm and supportive of continued robust consumption.

AMERICAS

The dollar remains firm as UST yields march higher. The 10-year yield traded at a three-month high around 4.31% today before falling back below 4.30%. The 4.30% level represents the 62% retracement objective of the April-September drop and a clean break above sets up a test of the April 25 high near 4.735%. In between are the July 1 high near 4.49% and the May 29 high near 4.64%. It’s worth noting that the 10-year yield bottomed on September 17, the day before the Fed cut rates 50 bp. Since the Fed cut, rising yields have helped the dollar mount a ferocious comeback and we see that trend continuing.

September JOLTS data will be today’s data highlight. Openings are expected at 8.000 mln vs. 8.040 mln in August. The openings rate rose to 4.8 in August, further above the 4.5 level that typically signals a sharply higher unemployment rate. Elsewhere, the ratio of vacancies to unemployed was 1.1 in August, which is historically pretty strong as that ratio has been above 1 only three times since 1960. We expect the data to remain consistent with a labor market soft-landing.

October Conference Board consumer confidence will also be reported. Headline is expected at 99.5 vs. 98.7 in September. If so, it would remain roughly within the same narrow range that’s held throughout the past two years. Of note, gasoline prices are the lowest since February and should continue falling as crude oil sinks, which in turn should push consumer confidence higher. Positive real wage growth, encouraging labor demand, and strong household balance sheets suggest household spending will remain an important tailwind to GDP growth.

U.S. growth remains robust. The Atlanta Fed’s GDPNow model is tracking Q3 growth at 3.3% SAAR and the final update will come today after the data. We get our first read of Q3 GDP tomorrow, with growth expected at 3.0% SAAR. Of note, Its initial forecast for Q4 will come Thursday. Elsewhere, the New York Fed’s Nowcast model is tracking Q3 growth at 2.9% SAAR and Q4 growth at 2.5% SAAR. Its Q4 forecast will be updated Friday, while its initial forecast for Q1 2025 will come at the end of November.

EUROPE/MIDDLE EAST/AFRICA

U.K. yields remain elevated on the prospects of greater gilt issuance ahead. The U.K.-German 10-year spread has widened back to last week’s high near 197 bp and is the highest since August 2023. Market participants expect gilt issuance for 2024/2025 to increase by another GBP15 bln, taking total borrowing up to GBP293 bln vs. GDP239 bln the previous fiscal year. Expectations that the government will sell more bonds to fund an increase in investment spending is worsening the risk premium on gilts and will undermine GBP, especially on the crosses. We’ll know more after Chancellor of the Exchequer Rachel Reeves presents the budget tomorrow.

U.K. BRC reported soft October shop prices. Headline fell -0.8%y/y vs. -0.5% expected and -0.6% in September, while food prices eased four ticks to 1.9% y/y. The drop in the headline was the biggest since August 2021 and bodes well for the official CPI data that will be reported November 20.

Germany reported November GfK consumer confidence. Headline came in at -18.3 vs. -20.5 expected and a revised -21.0 (was -21.2) in October. This was the highest since April 2022. The pollster noted that "despite this increase, the level of consumer sentiment remains extremely low. The anxiety caused by crises, wars and rising prices is currently still very pronounced."

Sweden GDP unexpectedly contracted in Q3. GDP fell -0.1% q/q vs. 0.3% expected and -0.8% in Q2. In y/y terms, GDP fell -0.1% vs. 0.5% expected and flat in Q2. The weak economy supports the case for more aggressive Riksbank policy rate cuts. Indeed, the market is pricing in nearly 75% odds of a jumbo 50 bp cut at the November 7 meeting. Looking ahead, the market is pricing in 150 bp of total easing over the next 12 months that would see the policy rate bottom at 1.75%, which is lower than the Riksbank’s 2.25% forecast.

ASIA

Japan Finance Minister Kato issued the boilerplate warning on FX. He warned it was “important that FX moves stably, reflecting fundamentals.” Kato also reiterated “we will closely monitor the foreign exchange market with a stronger sense of urgency, including watching for speculative trading.” Regardless, widening U.S.-Japan yield spreads support the uptrend in USD/JPY, which traded at a three-month high near 153.90 yesterday.

Japan reported solid September labor market data. Unemployment was expected to remain steady but instead fell a tick to 2.4%, while the job-to-applicant ratio was expected to remain steady but instead rose a tick to 1.24. The labor market remains relatively tight but there are really no wage pressures to speak of and is another reason for the BOJ to remain cautious.

Reports suggest China may issue over CNY10 trln of extra debt in the next few years. According to Reuters, the NPC may approve the long-awaited fiscal package on the last day of its November 4-8 meeting. This is higher than the CNY6 trln yuan (5% of GDP) figure reported by Caixin a few weeks ago. For reference, China’s 2008 fiscal bazooka totaled CNY4 trln (12.5% of GDP). In addition, reports suggest the NPC may approve all or part of issuance of up to CNY4 trln worth of special-purpose bonds for land and property purchases over the next five years. The prospect of a bigger fiscal thrust out of China can offer commodity sensitive currencies support. However, piling on more debt to support a burst property bubble is not the long-term solution China needs to address its huge debt overhang and rising deflation risks.

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