Bond strategists stand ground, say US Treasury yields have peaked

BENGALURU, Sept 11 – The benchmark US 10-year Treasury note yield has peaked in the current cycle, according to a majority of bond strategists polled by Reuters, although most said their conviction around that prediction was weak.

Despite yields rising over the past few months, analysts in a Reuters Sept. 5-11 poll held on to their predictions that sovereign yields will drop over the coming year, suggesting the recent sell-off in the bond market was mostly over.

A near 80% majority, or 23 of 29, who answered an additional question said yields on the 10-year note had already peaked in the current cycle. Bond prices move inversely to yields.

Roughly the same group of strategists said the same thing last month, about two weeks before the benchmark US yield hit a near-16-year high of 4.37%.

Slightly more than half, or 13 of those polled, said their conviction around the forecast was weak, with the remaining 11 saying it was strong.

“There’s a huge degree of uncertainty about the future of base interest rates and what inflation looks like on the other side of the current economic strength,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.

“Until we get a resolution of that, I’m not confident enough to say that we have certainly peaked for this cycle.”

The median forecast for the 10-year Treasury note yield was 3.91% by end-November, a 38 basis point drop compared with 4.29% on Monday. It was forecast to decline to 3.50% in a year.

That was despite the US economy showing little signs of slowing, and expectations the US Federal Reserve will hold its federal funds rate higher for longer.

“Currently there are two forces fighting. In the fourth quarter, we will see a weakening job market put pressure on consumer spending, which is needed to slow growth. This driver will make yields go lower,” said Zhiwei Ren, portfolio manager at Penn Mutual Asset Management.

“But asset managers’ positions are very long on Treasuries already, they don’t have room to buy more duration. If no one steps in to purchase the tremendous supply of Treasuries coming to the market soon, we will have a supply-demand imbalance.”

This could potentially move yields higher, Ren added, a view shared by only a handful of strategists in the poll.

Much will depend on how inflation, still running well over the Fed’s target of 2%, looks in the coming months. US CPI data, due Wednesday, are not expected to change the outlook much.

Still, the two-year Treasury yield, currently at 4.99%, was expected to decline to 4.61% in three months and 3.80% in a year, the survey showed.

The current negative spread between two-year and 10-year yields, a reliable indicator in the past for an oncoming recession, was forecast to stay largely unchanged from around 70 basis points by end-November.

“The yield curve has cruised forward through time in this weird inverted manner for over 12 months now, as rate cuts have gradually been priced further and further into the future,” added LeBas.

“I suspect we will see a similar theme throughout the balance of this year and into the early part of the next, keeping the curve pretty deeply inverted through then.”

Interest rate futures were now pricing in the first rate cut in the second quarter of 2024, compared to the first quarter expected a few weeks ago.

(Reporting by Sarupya Ganguly; Polling by Prerana Bhat, Purujit Arun, and Rahul Trivedi; Editing by Hugh Lawson)

Gold firms on dollar dip as US inflation test looms

Sept 11 – Gold edged up on Monday on a retreat in the dollar, with the focus still squarely on US inflation readings and their likely influence on the Federal Reserve’s interest rate trajectory.

Spot gold climbed 0.2% to USD 1,921.10 per ounce by 2:36 p.m. EDT (1836 GMT), while US gold futures settled 0.2% higher at USD 1,947.20.

The dollar index fell 0.5%, making gold less expensive for other currency holders.

Capping zero-yield gold’s uptick, however, yields on the benchmark 10-year Treasury note edged higher.

Traders were mostly positioning for the US consumer price data (CPI) on Wednesday, given its potential influence on whether the Fed may put rates on hold.

“Gold has started the week on a positive note on some dollar weakness, but prices will likely face some pressure in the near-term with the market expecting one more rate hike this year,” said Edward Moya, senior market analyst at OANDA.

“I don’t think we’ll be getting the green light for investors to become aggressive and getting back into the precious metal very soon.”

According to the CME FedWatch tool, traders predicted a 93% chance of Fed leaving rates unchanged at their Sept. 19 to 20 policy meeting. But the odds also suggested a 41% chance of a hike in November.

Ahead of their next meeting, Fed policymakers have been clear that they are not itching to raise rates, but few among them are ready to declare victory.

For gold futures to climb above USD 2,000 per ounce, the Fed needs to be less hawkish and the dollar index and Treasury yields need to back off, said Phillip Streible, chief market strategist at Blue Line Futures in Chicago.

Silver jumped 0.7% to USD 23.07 per ounce. Platinum added 0.6% to USD 897.79 per ounce and palladium gained 1.3% to USD 1,213.95.

(Reporting by Harshit Verma, Ashitha Shivaprasad, and Brijesh Patel in Bengaluru; Editing by Josie Kao)

Funds’ short dollar position smallest in three months: McGeever

ORLANDO, Florida, Sept 11- Hedge funds’ bearish view on the dollar is evaporating fast, and at the current pace of buying they will be outright bullish by the end of the month.

What’s more, recent history suggests that when funds go long dollars, they tend to stay long for a while. ‘Longer for longer’, if you like.

The latest Commodity Futures Trading Commission (CFTC) data shows that funds cut their net short dollar position to USD 7.17 billion, the smallest bet against the dollar since mid-June and a third of what it was six weeks ago.

It has halved in the last two weeks, and at the current pace, the speculative community will be net long of dollars by the end of the month. This shift has coincided with the dollar’s rise to a six-month high against a basket of currencies.

A short position is essentially a wager an asset’s price will fall, and a long position is a bet it will rise. Hedge funds often take directional bets on currencies, hoping to get on the right side of long-term trends.

This is broadly reflected in CFTC positioning cycles.

From May 2013 – when former Fed chief Ben Bernanke uttered his famous ‘taper tantrum’ remark – funds went net long dollars for an almost uninterrupted four-year stretch through June 2017, a bullish bet that peaked at a record USD 51 billion in late 2014.

That was followed by a year being net short dollars, nearly two years of being net long, before swinging back to being net long for over a year. Funds have been net short of dollars since November last year.

This suggests that although the dollar’s short-covering rally may not have much juice left in it, the greenback could find a solid source of long-term demand once the speculative community decides to turn outright bullish.

Whether funds do will hinge largely on the interest rate outlook.

There is a growing view that the Federal Reserve’s hiking cycle is over, which is intuitively negative for the dollar. But what matters is relative moves – changes in yields relative to current market pricing, and relative to other jurisdictions.

And that is a mixed picture, especially given the latest developments in Japan.

The two-year US-Japanese yield spread remains around 500 basis points in favor of the dollar, around the widest level in over 20 years. A quicker tightening shift from the Bank of Japan than is currently priced in could move that dial rapidly.

CFTC data show that funds are still holding a substantial net short yen position worth around USD 8.2 billion. Given that funds have been net short in the Japanese currency since March 2021, there is potential for the yen to snap sharply higher.

On the other hand, although CFTC funds cut their net long euro position to a seven-month low of 136,000 contracts, that is still a large USD 18 billion bet that the euro will appreciate.

If the European Central Bank brings its rate-hiking cycle to a premature end – not an unreasonable assumption as growth forecasts are slashed and Germany is seen falling into recession – there is plenty of scope for funds to liquidate their euro longs.

(The opinions expressed here are those of the author, a columnist for Reuters.)

(Writing by Jamie McGeever; Editing by Christina Fincher)

China’s central bank to peruse bulk dollar purchases – sources

BEIJING/SHANGHAI, Sept 11 – China’s central bank is tightening its scrutiny of bulk dollar purchases by domestic firms, three sources with direct knowledge of the matter said on Monday, at a time when the Chinese currency faces mounting depreciation pressure.

Companies that need to purchase USD 50 million or more will now need approval from the People’s Bank of China (PBOC), which convened a meeting with some commercial banks over the weekend on the matter, the sources said.

The directive is being issued as the Chinese yuan has declined by about 6% against the US dollar so far this year, falling to levels that were last seen during the 2008 global financial crisis.

The PBOC had no immediate comment on plans to increase its scrutiny of dollar purchases when contacted by Reuters.

(Reporting by Beijing and Shanghai Newsroom; Editing by Christian Schmollinger)

Sterling gets a lift from dollar’s decline vs yen

LONDON, Sept 11 – The pound rose on Monday, taking advantage of a hefty decline in the dollar against the Japanese yen that spilled into other currencies.

Against the yen, the pound fell by almost 1% after Bank of Japan Governor Kazuo Ueda at the weekend said the central bank could end its policy of negative interest rates, which has undermined the yen, when achievement of its 2% inflation target is in sight.

The dollar bore the brunt of the rush into the yen, falling by the most in two months against the Japanese currency.

Sterling was last up 0.4% against the dollar at $1.2521. Against the euro, the pound put in a slightly less robust performance, rising by 0.2% to 85.70 pence.

The pound fell by almost 1% against the dollar last week, as a combination of stronger economic data and weaker investor confidence fuelled a push into the U.S. currency.

It has lost about 5% in value since July’s 15-month peak, but it is still up by over 20% since last September’s record lows and is up 3.5% so far this year, pitting it against the Swiss franc, the top performer against the dollar in 2023, which is up 3.7%.

The Bank of England meets next week to discuss monetary policy. Traders are attaching a 70% chance of a quarter-point rise in the Bank Rate to 5.50%. But they have slashed the chances of another rate rise after that, marking a sharp turnaround from just a week ago, when money markets showed UK rates were expected to peak at closer to 5.7% by March.

Part of sterling’s resilience this year has been the perception that the BoE has a lot more work to do to bring down inflation and will need to raise interest rates more than many other central banks.

But with the end seemingly in sight as far as markets are concerned, sterling may struggle to gain much upward momentum in the coming weeks, according to MUFG strategists led by Derek Halpenny.

“We currently still expect a hike but weak key data into the meeting could see conviction on a hike undermine sterling performance further over the short-term,” they said in a note.

The MUFG team said according to their valuation models, sterling is one of the most undervalued currencies against the dollar, to the tune of 3.23%.

Their model uses short-term swap rates, the performance of the stock market and where short-term bond yields trade relative to longer-term ones.

Right now, the pound is trading at a large discount to their model.

“Short-term shifts between spot and the model suggest a currency pair is no longer in sync with financial and economic fundamentals and the market is adding a risk premium to the currency pair,” they said.

(Reporting by Amanda Cooper; Editing by Emelia Sithole-Matarise)

Oil prices settle mostly flat ahead of monthly oil forecasts

Sept 11 – The benchmark oil price settled largely unchanged on Monday, holding above the USD 90 a barrel reached last week for the first time in 10 months following fresh Saudi and Russian crude output cuts.

Brent crude settled down 1 cent to USD 90.64 a barrel while US West Texas Intermediate crude settled down 22 cents to USD 87.29.

Saudi Arabia and Russia last week announced that they will extend voluntary supply cuts of a combined 1.3 million barrels per day (bpd) until the end of the year.

The supply cuts overshadowed continuing concern over Chinese economic activity. On Monday US Deputy Treasury Secretary Wally Adeyemo said that China’s economic problems were more likely to have a local impact than affect the United States.

“Much of this reduced supply has simply served to offset a major slowdown in global oil demand,” said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Illinois.

US crude inventories are expected to fall for the fifth week in a row by about 2 million barrels, a preliminary Reuters poll showed on Monday.

Crude supply could also see fresh disruption from powerful storms and floods in eastern Libya, in which more than 2,000 people have died and which has forced the closure of four major oil export ports since Saturday – Ras Lanuf, Zueitina, Brega, and Es Sidra.

Meanwhile, Europe is expecting a light refinery maintenance season this autumn as refiners look to profit from high margins, which could support crude demand. Offline refinery capacity in Europe is pegged at around 800,000 bpd according to consultancy Wood Mackenzie, down by 40% year-on-year.

A batch of macroeconomic data expected this week will inform whether central banks in Europe and the United States continue their aggressive rate hike campaigns.

US August consumer price index (CPI) data is due on Wednesday and could provide a steer on whether more increases to interest rates will be on the cards.

The inflation data is likely to influence everything from stocks to foreign exchange, fixed income, and commodity prices, said Naeem Aslam of Zaye Capital Markets.

The European Central Bank is also expected to announce its interest rate decision this week. On Monday, the European Commission forecast the eurozone to grow more slowly than previously expected in 2023 and 2024.

In focus too are monthly reports from the International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC) due later this week.

The IEA last month lowered its 2024 forecast for oil demand growth to 1 million bpd, citing lackluster macroeconomic conditions. OPEC’s August report, meanwhile, kept its 2.25 million bpd demand growth forecast unchanged.

(Additional reporting by Robert Harvey, Natalie Grover, Florence Tan, and Emily Chow;
Editing by Emelia Sithole-Matarise, Andrea Ricci, and Chizu Nomiyama)

Gold climbs as US inflation data takes centre stage this week

Sept 11 – Gold prices rose on Monday, supported by a sharp retreat in the dollar as investors look forward to US inflation data that could sway the Federal Reserve to raise interest rates later in the year.

Spot gold jumped 0.5% to USD 1,927.09 per ounce by 0749 GMT, while US gold futures GCcv1 rose 0.4% to USD 1,950.80.

Gold should be supported above the USD 1,900 level if we see the U.S. dollar continue to decline on bets that the Fed are indeed done with their tightening cycle, said Matt Simpson, a senior analyst at City Index.

Gold had found support around its 200-day moving average, an important technical level not easy to crack, he said, adding that if U.S. inflation undershoots that could weigh further on the dollar.

The US Consumer Price Index (CPI) data for August due on Wednesday is expected to shape the Fed’s interest rate decisions this year.

KCM Trade Chief Market analyst Tim Waterer said the inflation numbers could creep to the upside courtesy of ascending energy prices, which will keep alive the odds of another 25-basis-point (bps) move by the Fed come November.

Ahead of their policy-setting meeting this month, Fed policymakers have been pretty clear about two things: they are not itching to raise interest rates, but few among them are ready to declare victory, either.

The U.S. dollar dropped 0.5% and benchmark 10-year bond yields shed 0.3%, making non-yielding bullion more attractive for overseas buyers.

“The precious metal will likely be relying on a pullback in yields in order to again challenge the USD 1,950 level,” Waterer said in a note.

Spot gold may retest a resistance at USD 1,930 per ounce, according to Reuters technical analyst Wang Tao.

Elsewhere, spot silver jumped 1% to USD 23.14 per ounce, platinum added 0.9% to USD 900.95 after a 7% decline last week, and palladium edged 0.8% higher to USD 1,207.19.

(Reporting by Swati Verma in Bengaluru; Editing by Sherry Jacob-Phillips, Subhranshu Sahu and Janane Venkatraman)

Tightest financial conditions this year bite

Sept 11 – Asian markets are set for a nervous open on Monday as worries mount that last week’s equity selloff could accelerate, financial conditions continue to tighten, and investors brace for a raft of economic data from China throughout the week.

There seems to be no obvious market impact from the G20 summit in India, and politically influenced trading will likely be dominated by US-China tensions. Last week Apple’s 6% slide wiped USD 180 billion off its market cap on news that Beijing had banned government employees from using iPhones at work.

Broader market sentiment is fragile. The Nasdaq shed 2% last week, and the S&P 500, MSCI World and MSCI Asia ex-Japan Index all fell more than 1%.

Tightening financial conditions from high bond yields and a strong dollar, and unease about the looming lag effects of the Fed’s rate hikes are coming together in what has been historically a notoriously volatile month for stocks.

According to Goldman Sachs’s real-time indexes, financial conditions in China, and emerging markets globally are now the tightest since last November.

The dollar is at a six-month high, Asian currencies are feeling the heat, and traders are on intervention alert – India’s rupee posted a record closing low on Thursday and the Japanese yen, Philippine peso, and Thai Baht are at their lowest levels this year.

Currencies may also get direction from a sprinkling of key economic indicators across the region this week – Indian trade and inflation, Australian unemployment, Indonesia retail sales, and Japanese industrial production and machinery orders.

The economic data spotlight this week will shine on China. Beijing often concentrates the release of key indicators into short bursts – often referred to as the ‘Chinese data dump’ – but this one is particularly heavy.

Money supply, loan growth, social financing (a broad measure of credit and liquidity in the economy), retail sales, industrial production, unemployment, house prices, and fixed asset investment are all due for release by September 15.

That follows producer and consumer price inflation figures on Saturday that suggest disinflationary pressures are sticky. Annual PPI was negative for the 11th month in a row, and annual CPI rose only 0.1%, undershooting forecasts of a 0.2% increase.

The state of China’s economy will be much clearer by the end of the week, as will the scale of the task facing authorities to provide the necessary monetary and fiscal stimulus to keep Beijing’s goal of 5% GDP growth this year in sight.

But complicating this is the yuan, which is at a 16-year low. Further policy easing will put it under even heavier downward pressure, risking a spiral of FX depreciation, asset market weakness, and capital flight.

Here are key developments that could provide more direction to markets on Monday:

– Malaysia industrial production (July)

– Japan money supply (August)

– US 3-year note auction

(By Jamie McGeever; Editing by Diane Craft)

Investor hopes for US soft landing ride on inflation data

NEW YORK, Sept 8 – US stock investors are turning their focus to next week’s inflation data, which could determine the near-term path of an equity rally that has wobbled in recent weeks.

Signs the US economy is on track for a so-called soft landing, where the Federal Reserve is able to bring down inflation without badly damaging growth, have helped power the S&P 500’s 16% year-to-date gain.

Last week’s employment data played into that narrative, showing the job market remained robust, though not strong enough to spark worries that the Fed would need to hike interest rates more to fight inflation, moves that rocked markets last year.

Consumer price data next week may need to strike a similar balance, investors said. Too high a number could fan fears of the Fed leaving interest rates higher for longer or hiking them more in coming months. That would give investors less reason to hold onto stocks after a tech-led drop in which the S&P 500 lost about 5% from summer highs.

“This inflation demon is far from being destroyed,” said Michael Purves, head of Tallbacken Capital Advisors, who expects signs of higher inflation will weigh on the multiples of megacap growth names that have powered the rally. “If we’re hitting a structural shift with higher nominal GDP growth, that will come with some volatility and unintended consequences.”

Investors trying to assess future Fed policy will watch other data in the coming week too, including a reading of the producer price index and retail sales.

The US central bank is widely expected to hold benchmark rates steady at its Sept. 20 meeting. Markets are also pricing in a nearly 44% chance of a rate hike at the Fed’s Nov. meeting, up from 28% a month ago.

“If we get a high inflation print we will see those expectations pick right up” for September and November, said Randy Frederick, managing director of trading and derivatives for the Schwab Center for Financial Research.

OPTIMISTIC, BUT CAUTIOUS

Strategists and investors currently have largely held faith in the market despite stocks’ recent wobble. Some, though, are growing more cautious.

Reasons for optimism include the relative outperformance of the US economy compared to Europe and China, and signs the so-called profit recession among S&P 500 companies may be over.

Still, worries over an economic slowdown in China and concerns that US corporate margins will shrink have led some market participants to believe squeezing more gains out of stocks will grow more difficult.

The S&P 500 Information Technology sector lost more than 2% this week following news that Beijing had ordered central government employees to stop using iPhones for work. Apple (AAPL) shares fell 6% for the week on fears the company and its suppliers could take a hit from rising competition from China’s Huawei.

“We think we are still in a bull market that will hit new highs before the end of the year, but it will be a choppy road,” said Ed Clissold, Chief US Strategist at Ned Davis Research.

The S&P 500 is down about 5% from its July highs, which has made stock valuations broadly more attractive given the low possibility of an imminent recession, said Jonathan Golub, senior equity strategist at Credit Suisse Securities.

Forward price to earnings multiples for 10 out of the 11 sector groups of the S&P 500 fell in August, he noted, though the P/E for the index as a whole remains near 20, compared with 17 at the end of 2022.

Still, much of the bull case for stocks hinges on softer inflation eventually pushing the Fed to lower interest rates.

“If we saw a further material rise in interest rates, the equity market would not take that well,” said David Lefkowitz, head of US equities at UBS Global Wealth Management.

(Reporting by David Randall; Editing by Ira Iosebashvili and David Gregorio)

Longer-dated yields slip after Fed comments, still higher for the week

NEW YORK, Sept 8 – Longer-dated US Treasury yields declined on Friday, after comments from a host of Federal Reserve officials pointed toward a pause in the central bank’s rate hike cycle, but yields were still on track for a weekly gain.

Recent comments from Fed officials as a whole have indicated the central bank is content to keep rates steady at their next policy meeting on Sept. 19 to 20, but is not ready to declare the war on inflation is over. Investors will get another look at price pressures next week with the release of the consumer price index (CPI) on Wednesday.

“These yield levels have been really appealing to people, especially so at the front end of the curve but most people are long-term investors and they know in the back of their minds that high cash yield could turn out to be temporary and if they want to get a high yield locked in for the long term, you have to go further out,” said Robert Tipp, Chief Investment Strategist and Head of Global Bonds at PGIM Fixed Income in Newark, New Jersey.

“There is a higher degree of uncertainty about where things are going to go, but on balance I would say the fundamentals have been supportive of the idea of the Fed being at the end of the cycle, which one way or another supports the concept that you are going to be near a peak in rates.”

The yield on the benchmark US 10-year Treasury note on Friday shed 1 basis point at 4.256%. The 10-year yield is up about 9 basis points for the week, which would be its largest gain in about a month.

The yield on the 30-year Treasury bond fell 2 basis points to 4.332%.

Expectations for the Fed to keep rates steady at the next meeting stand at 93%, according to CME’s Fedwatch Tool, up from 92% one day ago.

Yields had moved sharply higher earlier in the week as a large influx of corporate supply sapped demand and stronger-than-expected economic data raised concerns the Fed could have room to continue hiking rates.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 72.4 basis points.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, rose 2 basis points to 4.978%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.312%, after closing at 2.283% on Thursday.

The 10-year TIPS breakeven rate was last at 2.335%, indicating the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Chizu Nomiyama and Josie Kao)

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