Dollar gains as investors see Fed stance likely unchanged; euro, sterling fall

NEW YORK, Oct 5 (Reuters) – The dollar rebounded from recent weakness on Wednesday as investors viewed the US Federal Reserve’s aggressive stance on interest rates as likely unchanged, with the euro and sterling down at least 1% each.

The euro was down 1% at USD 0.9892, and was set for its biggest daily percentage slide since Sept. 23, after rising 1.7% on Tuesday.

Sterling was down 1.1% at USD 1.1344 after rising for six straight sessions. Its fall extended slightly as UK Prime Minister Liz Truss pledged to bring down debt as a share of national income, just over a week after the government’s plans to slash taxes and ramp up borrowing spooked markets.

Adding to the pressure on the pound, data showed Britain’s private-sector economy last month suffered the sharpest contraction in activity since a COVID-19 lockdown early last year.

A dollar index measuring the greenback against a basket of currencies was last up about 1%. On Tuesday, it had its biggest daily percentage decline since March 2020.

Recent gains for most major currencies against the dollar have been underpinned by hope among investors and traders that the Fed will raise interest rates by less than previously expected.

“You had a general risk-on where the euro, sterling really traded well and the stock market gained. I kind of think this is just (investors) exploring a trading range,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York.

“The bottom line is the bounce in risk assets is not taking place because of a change in Fed views,” he said.

On Wednesday, the ADP National Employment report showed private employment rose by 208,000 in September, above the 200,000 consensus forecast of economists polled by Reuters, while separately the Institute for Supply Management’s (ISM) non-manufacturing PMI reading came in slightly above expectations.

Also, US Fed Governor Philip Jefferson reiterated overnight that inflation was the top target for policymakers and that growth would suffer in efforts to bring it down.

San Francisco Fed President Mary Daly took a softer line and said the impact of the dollar, which is up sharply this year, on other currencies and economies was a concern.

From here, investors are likely to focus on Friday’s US jobs report, Bannockburn’s Chandler said, which will be watched for clues on the possible trajectory of the Fed’s monetary policy.

In other currencies, the dollar was up 0.2% against the Japanese yen, while the dollar was up 0.4% at 7.0676 against China’s offshore yuan. Chinese authorities have come out in recent weeks with maneuvers to slow the yuan’s slide.

A fifth consecutive 50-basis-point rate hike from the Reserve Bank of New Zealand (RBNZ) on Wednesday reminded investors that inflation remains the main focus of central banks.

The New Zealand dollar was last up 0.1% at USD 0.5744, having jumped as much as 1.3% earlier in the session. The Aussie dollar was near flat at USD 0.6502.

(Additional reporting by Harry Robertson in London. Additional reporting by Tom Westbrook in Sydney; Editing by Bernadette Baum and Jonathan Oatis)

Mixed inflation signals

Oct 6 (Reuters) – As the US inflation debate intensifies, the signals are getting murkier.

For investors, this makes markets more skittish and day-to- day moves harder to predict, and makes Fed forecasting even more difficult than it already is.

On Wednesday, the headline US services ISM purchasing managers index reading for September was surprisingly strong, declining far less than expected to 56.7 from 56.9. ADP employment figures for September were also stronger than expected.

On the other hand, the ISM prices paid index fell to 68.7, the lowest since January last year. And Tuesday’s “JOLTS” jobs data show job openings fell in August at the fastest pace in nearly 2-1/2 years.

Oil prices spiked higher on Wednesday after OPEC+ announced a whopping 2 million barrels a day production cut, yet Brent’s year-on-year rise – which factors into inflation forecasting models – is ‘only’ 13%.

Also this week, US breakeven inflation rates on inflation-linked bonds, from two-years maturities out to 20 years, have slid as low as 2.15% – close to the Fed’s 2% inflation goal – while the University of Michigan’s consumer inflation expectations have fallen too.

Another four Fed officials will be on the tapes on Thursday, hopefully shedding some much-needed light on the inflation debate. For now, it seems like investors are itching for the Fed to pivot, but are not fully confident one would be merited.

Wall Street clawed back opening losses on Wednesday despite the spike in Treasury yields to keep its solid start to the quarter on track. The S&P 500’s surge of 5.7% was its best start to a new quarter in decades.

Key developments that could provide more direction to markets on Thursday:

India services PMI (September)

Australia trade balance (August)

Philippines unemployment (August)

Euro zone retail sales (August)

Fed’s Mester, Cook, Evans and Waller speak

IMF’s Georgieva speaks ahead of IMF/World Bank meetings

(Reporting by Jamie NcGeever in Orlando, Fla.; Editing by Josie Kao)

US yields jump as hope for Fed pivot fizzles

NEW YORK, Oct 5 (Reuters) – The yield on the benchmark US 10-year Treasury note jumped on Wednesday after two straight days of declines, as economic data failed to buttress recent hopes the US Federal Reserve might adopt a less hawkish policy stance.

US economic data over the past two days hinting the labor market and economy were slowing, as well as a surprise move by the Reserve Bank of Australia (RBA) to raise rates by a less-than-expected 25 basis points helped push the yield on the 10-year down nearly 19 basis points as optimism grew the Fed might start to be less aggressive in tightening policy.

The yield on 10-year Treasury notes was up 14.4 basis points to 3.761%, on track for its biggest one-day jump since Sept. 26.

But on Wednesday, the ADP National Employment report showed private employment rose by 208,000 in September, above the 200,000 estimate of economists polled by Reuters and the 185,000 for August that was revised higher.

In addition, the Institute for Supply Management (ISM) said its non-manufacturing PMI dipped to a reading on 56.7 last month from 56.9 in August, but was above the 56.0 estimate, while its employment gauge jumped up to 53 from 50.2 in the prior month.

“The mistake some investors may be making is to be overly optimistic about a Fed pivot in the near term and they have been abundantly clear that the bar for that is just extraordinarily high to the point they haven’t even talked about a pivot,” said Bill Merz, head of capital market research at US Bank Wealth Management in Minneapolis.

“So optimism that maybe there is a Fed pivot around the corner is quite premature.”

The yield on the 30-year Treasury bond was up 8.1 basis points to 3.768%.

Investors will get two more looks at the labor market this week in the form of weekly initial jobless claims and the September payrolls report, with soft data likely to be welcomed.

Taking a different path than the RBA, the Reserve Bank of New Zealand (RBNZ) on Wednesday raised rates by 50 basis points to a seven-year high and contemplated whether to hike by 75 basis points, helping to dent hopes for a Fed shift.

Also on the hawkish side, the Swiss National Bank is prepared to raise interest rates further to tackle inflation after its recent 75-basis-point hike, SNB Governing Board member Andrea Maechler said.

Fed officials have been steadfast in recent comments that the central bank will take aggressive measures in hiking interest rates to combat rising inflation even after three straight hikes of 75 basis points.

San Francisco Federal Reserve Bank President Mary Daly said on Wednesday that markets are working well and the central bank is “resolute” on raising rates to bring down inflation.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as a reliable indicator of an economic recession when inverted, was inverted by 39.5 basis points, up from the negative 57.85 hit on September 22.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 5.7 basis points at 4.154%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.32%, after closing at 2.34% on Tuesday.

The 10-year TIPS breakeven rate was last at 2.219%, indicating the market sees inflation averaging 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Nick Zieminski, Kirsten Donovan)

Gold retreats on comeback in US dollar, yields

Oct 5 (Reuters) – Gold prices slipped more than 1% on Wednesday, weighed down by a jump in the dollar and US Treasury yields in the run up to US jobs data that could influence the Federal Reserve’s rate hike path.

Spot gold was down 0.8% at USD 1,712.93 per ounce by 1:52 p.m. ET (1752 GMT), after hitting a three-week peak at USD 1,729.39 on Tuesday.

US gold futures settled 0.6% lower at USD 1,720.80 per ounce.

“We’re seeing a resurgence in the dollar and yields, as a result, we’ve seen a pullback in gold after a pretty aggressive move higher over the course of the last several sessions,” said David Meger, director of metals trading at High Ridge Futures.

Making gold less appealing for other currency holders, the dollar gained over 1% against its rivals, after posting its worst day since March 2020 on Tuesday. Benchmark US 10-year Treasury yields US10YT=RR also climbed.

Data showed US private employers stepped up hiring in September, suggesting demand for workers remains strong despite rising interest rates and tighter financial conditions.

Focus now shifts to the US Labor Department’s closely watched nonfarm payrolls data for September on Friday.

“The Fed is very much focused on the jobs market right now. We’ve seen little hints as to slowdown in manufacturing. However, if we do see a better-than-expected jobs number, that may be disappointing to the gold market,” Meger said.

Gold is highly sensitive to rising US interest rates, as these increase the opportunity cost of holding non-yielding bullion.

Spot silver dropped 2.7% to USD 20.54 per ounce, after rising to a three-month peak in the previous session.

“Silver had previously been significantly undervalued vis-à-vis gold. Its undervaluation now is no longer so pronounced,” Commerzbank analysts said in a note.

Platinum fell 1.5% to USD 915.97 per ounce, and palladium dipped 2.8% to USD 2,250.67.

(Reporting by Brijesh Patel in Bengaluru; Additional reporting by Bharat Govind Gautam; Editing by Maju Samuel and Krishna Chandra Eluri)

Global bond funds see biggest outflows in two decades

Oct 5 (Reuters) – Global bond funds saw the biggest outflows in two decades in the first three quarters of this year as hefty interest rate increases by central banks to tame inflation sparked fears of a recession.

According to Refinitiv Lipper, global bond funds faced a cumulative outflow of USD 175.5 billion in the first nine months of this year, the first net sales in that period since 2002.

Global bond funds declined by 10.2% on average in their net asset values, their worst slump since at least 1990, the data showed.

Governments and companies have borrowed heavily in the past few years, taking advantage of ultra-low interest rates, and they now stare at bigger interest liabilities due to a rise in yields.

“The combination of high debt levels and a rise in interest rates has reduced investors’ confidence in the government’s ability to pay back debt, which has resulted in the massive outflows we are seeing,” said Jacob Sansbury, CEO at Pluto Investing.

He added that outflows from bond funds might continue into 2023, as a reduction in interest rates and reduced debt loads are unlikely.

Emerging market bonds faced an outflow of about USD 80 billion in the first three quarters of this year, while US high yield bonds and inflation-linked bonds witnessed net sales of USD 65.81 billion and USD 16.44 billion, respectively.

The iShares UK Gilts All Stocks Index (UK) recorded outflows of USD 6.67 billion in the last quarter, while the ILF GBP Liquidity Plus Class 2 LP60100834 and Vanguard U.K. Short Term Investment Grade Bond Index GBP Acc fund saw withdrawals of USD 2.16 billion and USD 993 million respectively.

BONDS ATTRACTIVE NOW

However, some funds managers said bonds looked attractive after the slump this year.

The ICE BoFA US Treasury Index has fallen 13.5% so far this year, while the Bloomberg Global Aggregate Bond Index has shed about 20%.

“The yield cushion now protects the investor against negative total returns significantly more than it did at the beginning of the year,” said Jake Remley, portfolio manager at Income Research + Management.

“This almost certainly makes the prospects for bonds better between now and year-end, even if interest rates continue to rise as briskly as they have over the past 9 months.”

The yields on 2-year and 10-year US Treasury bonds stood around 4.12% and 3.68% respectively on Wednesday, compared with 0.7% and 1.5% at the start of the year.

Similarly, the yield on the ICE BofA US High Yield index, the commonly used benchmark for the junk bond market, stood at 9%, compared with 4.3% at the start of the year.

“Some bonds have become the proverbial ‘babies thrown out with the bathwater’ and offer compelling value at these levels,” said Ryan O’Malley, portfolio manager at Sage Advisory Services.

“However, it’s important to note that there will likely be further credit stress in many corners of the bond market and risk management is paramount in these uncertain times.”

(Reporting By Patturaja Murugaboopathy; Editing by Vidya Ranganathan and Mark Potter)

As Asia’s borrowers turn homeward, local bond issuance surges

SINGAPORE, Oct 5 (Reuters) – Asian issuance of bonds denominated in local currencies have ballooned to their largest in more than a decade as borrowers turn shy of expensive US dollar debt and tap cheaper, liquid markets at home.

A total of USD 2.65 trillion has been raised in Asia excluding Japan and Australia via 12,075 local currency bond issues by September, data from Refinitiv showed.

That reflects a roughly 10% increase in proceeds from a year earlier and the highest for the year-to-date period in over a decade.

Of this, 47.2% came from government issuers, at USD 1.25 trillion across 2,057 issues. This was followed by the financials sector, constituting 31.2%, or USD 825.78 billion, from 5,419 issuances.

“Local currency markets are more peculiarly insulated from what’s happening on the global front,” said Wong Kwok Kuan, managing director and regional head of debt markets at Maybank Investment Banking Group.

The Federal Reserve has hiked interest rates by 300 basis points (bps) since the start of the year, taking the Fed funds target rate above 3%. The latest projections show that rate rising to 4.25%-4.5% by the end of 2022.

That frenetic pace of rate rises makes local currency bonds relatively cheaper to issue than dollar bonds, particularly as the dollar scales multi-year highs and weakens local currencies.

Meanwhile, rate hikes in Asia have generally been more subdued.

Bank Indonesia, for instance, only began hiking in August and has raised rates by a total of 75 bps. The Philippine central bank has increased rates by 225 bps since May and the Bank of Thailand has hiked by 25 bps twice, in August and September.

Andrew Lim, regional head of debt capital markets at Maybank Investment Banking Group, pointed to how the US dollar capital market had also “seen periods where it was shut given the macro volatility”, causing corporates to look onshore.

PALATABLE COST

Indonesian company Mandiri Tunas Finance, which is majority-owned by Bank Mandiri, raised 376.615 billion rupiah (USD 24.80 million) of 5-year bonds at 6.75% in February. In August 2020, it paid 8.6% on 5-year bonds.

Yields on the 5-year US Treasuries have risen from about 0.4% in December 2020 to about 3.8% currently. Credit bonds are typically priced on spreads over sovereign bonds.

The yield on Asian investment grade corporate dollar bonds is now at 5.8%, up 300 bps this year.

The spurt in local bond issuance has also been spurred by a growing appetite for such bonds, as domestic investors – typically the main buyers – hunt for opportunities to stay invested at home.

“The local currency markets are well supported by domestic institutional investors such as life insurance companies and asset managers, as they have local currency assets and specific mandates to deploy into these markets,” said Edmund Leong, UOB’s head of group investment banking.

Thailand-headquartered Gulf Energy Development Public Company Limited successfully issued debentures totalling 35 billion baht (USD 940 million) in August, of which 11 billion baht was distributed to high net worth investors, banks, insurance and securities firms.

To be sure, investors say that the volume and amounts raised from issuances this year are not surprising, and reflect steady growth in markets over the past years.

From 2020 to 2021, the total amount raised from local currency bonds issued in Asia, excluding Japan and Australia, increased by nearly 15%, and from 2019 to 2020, proceeds were nearly 30% higher.

Even as rates rise, issuers are expected to continue tapping domestic markets for refinancing of existing debt and other capital requirements.

“I’d say financing costs remain within expectations, palatable,” said Leonard Kwan, portfolio manager of T. Rowe Price’s dynamic emerging markets bond strategy.

“For the most part, it would still be cheaper to finance domestically, even at current higher rates, than external markets.”

(USD 1 = 15,185.0000 rupiah)

(USD 1 = 37.2300 baht)

(Reporting by Rae Wee; Editing by Vidya Ranganathan and Kim Coghill)

Oil prices little changed ahead of OPEC+ talks on supply cut

SINGAPORE, Oct 5 (Reuters) – Oil prices were little changed on Wednesday ahead of a meeting of OPEC+ producers to discuss a big cut in crude output after gaining more than 3% in the previous session.

Brent crude was up 1 cent at USD 91.81 a barrel at 0628 GMT, after climbing USD 2.94 in the previous session.

US West Texas Intermediate (WTI) crude futures fell 9 cents, or 0.1%, to USD 86.43 a barrel after gaining USD 2.89 a day earlier.

The Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, together called OPEC+, will meet in Vienna later on Wednesday to discuss output cuts of up to 2 million barrels per day (bpd), an OPEC source told Reuters.

A cut of that magnitude would be the biggest by OPEC+ since those made after the COVID-19 pandemic slashed demand in 2020.

“I will not be surprised if “buy the rumour, sell the fact” could happen since the strong rally in crude prices may have priced in such a production cut,” said Tina Teng, an analyst at CMC Markets.

Stephen Innes, managing partner at SPI Asset Management, said there “is a degree of profit taking and risk reduction ahead of the OPEC gathering”.

The United States is pushing OPEC+ producers to avoid making deep cuts, a source familiar with the matter told Reuters, as President Joe Biden looks to prevent a rise in US gasoline prices.

The real impact on supply from a lower output target would be limited as several OPEC+ countries are already pumping well below their existing quotas. In August, OPEC+ missed its production target by 3.58 million bpd.

However an agreement on big cuts “would send a strong message that the group is determined to support the market,” ANZ Research analysts said in a note, adding that it “would significantly tighten the market.”

US crude oil stocks fell by about 1.8 million barrels for the week ended Sept. 30, according to market sources citing American Petroleum Institute figures on Tuesday.

Capping gains for the day was the stronger dollar which makes oil more expensive for buyers holding other currencies, reducing demand.

(Reporting by Sonali Paul in Melbourne and Isabel Kua in Singapore; editing by Simon Cameron-Moore and Jason Neely)

Gold retreats as dollar steadies ahead of US jobs data

Oct 5 (Reuters) – Gold slipped on Wednesday as the dollar steadied, but bullion hovered above key level of USD 1,700 per ounce as investors held off making bigger moves ahead of US jobs data that could influence the Federal Reserve’s policy tightening path.

Spot gold was down 0.2% at USD 1,722.49 per ounce, as of 0625 GMT. Bullion lost some ground after rallying to its highest since Sept. 13, at USD 1,729.39, on Tuesday.

US gold futures dipped 0.1% to USD 1,728.10.

The dollar index stabilised somewhat after marking its biggest drop since March 2020 overnight.

Gold could break above the key resistance level of USD 1,735 in case of a weak ADP employment data, City Index analyst Matt Simpson said, adding markets are very sensitive to employment data at the moment.

The ADP National Employment Report, due at 1215 GMT, comes on the heels of a government survey that showed US job openings fell by the most in nearly 2-1/2 years in August, hinting at a cooling labour market.

This will be followed by the US Labor Department’s closely watched nonfarm payrolls (NFP) data later in the week.

“In case of a miss, traders will probably assume a weak NFP on Friday and that could weaken the dollar as traders get more excited about a Fed pivot and strengthen gold,” Simpson said.

US Fed officials recently reiterated their pledge to bring stubbornly high inflation under control.

While gold is traditionally seen as a hedge against inflation, rising US rates have dimmed the appeal of the zero-yielding asset. Gold is down 6% for the year so far.

On the physical front, sources told Reuters that gold-supplying banks have cut back shipments to India and focusing on China, Turkey, and other markets where better premiums are offered.

Spot silver slipped 1% to USD 20.89 per ounce, platinum fell 0.4% to USD 926.63 and palladium was 0.3% lower at USD 2,310.31.

(Reporting by Eileen Soreng in Bengaluru; Editing by Sherry Jacob-Phillips)

Philippines launches benchmark-sized dollar bond issue

MANILA, Oct 5 (Reuters) – The Philippine government has launched a three-tranche, benchmark-sized bond issue denominated in US dollars, National Treasurer Rosalia de Leon said on Wednesday.

The bonds have tenures of five years, 10.5 years and 25 years.

(Reporting by Enrico Dela Cruz)

Hopes of elusive Fed pivot drives markets higher once again

NEW YORK, Oct 4 (Reuters) – Investors suffering through a bruising year for markets are hoping that recent signs of wobbling economic growth will force the Federal Reserve and other global central banks to take their foot off the gas in the fight against inflation, sparking sharp rebounds in stocks and bonds.

The S&P 500 is up nearly 6% over the last two days, following a brutal September in which it fell 9.3% alongside declines in other global equity benchmarks. Yields on US Treasuries, which move inversely to prices, have plummeted by 33 basis points in October from multi-year highs hit last month.

Investor expectations of how high the Fed will raise rates in its battle against inflation have slipped in recent days, amid signs that growth in the US may finally be slowing. Investors in the futures markets now expect the fed fund rate to peak at 4.5% next year, compared to the expected peak of about 4.7% they were pricing in last week.

“The markets are sniffing out a blink by the Fed,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “If they pause here, not only does the rate pressure suddenly drop but maybe you end up with a mid-cycle slowdown, rather than a recession.”

Markets have rallied on the hopes of a Fed pivot several times this year only to reverse and crumble to fresh lows, making investors wary of the current bounce. This time around, a series of weaker-than-expected data on manufacturing and job openings in the United States are among the factors fueling hopes that weakening growth will push the Fed to slow its market-punishing rate hikes.

Some investors have also taken Tuesday’s smaller-than-expected rate increase from Australia’s central bank and a decision by the Britain’s new government to scrap planned tax cuts as signs that governments and monetary authorities are being increasingly responsive to signs of weakening growth and market instability.

“There is a growing sense that financial markets are showing sufficient stress as to warrant a collective pivot away from the global trend toward tighter policy,” said Ian Lyngen, head of US rates strategy at BMO Capital Markets.

Plenty of market participants are skeptical the rebounds in stocks and bonds will last. Mark Haefele, chief investment officer at UBS Global Wealth Management, attributed the stock rebound to “oversold” conditions in the S&P 500, exacerbated by month-end rebalancing by money managers at the end of September that drove stocks lower.

The sentiment was shared by Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions, who believes the bounce was helped by bearish investors covering their positions after September’s deep declines.

“Toward the end of last month sentiment got pretty bearish and it doesn’t take much to spook some of these guys to come in and cover their positions,” he said.

Analysts at BofA Global Research on Tuesday pointed out that retail traders have shown few signs of capitulation, one signal they say would represent a potential market bottom. Meanwhile, the Cboe Volatility Index .VIX, known as Wall Street’s fear gauge, has not climbed to levels that have marked past turning points in past sell-offs.

“It’s not clear to me that you’ve seen panic yet,” said Ashwin Alankar, head of Global Asset Allocation at Janus Henderson Investors. “Until you see panic it’s not the best time to start adding risk to a portfolio at a rapid clip.”

The signs of softening in the labor market shown by JOLTS data, meanwhile, may not be enough for the Fed to feel comfortable pausing in its pace of rate hikes, analysts at Capital Economics wrote on Tuesday.

While the data “won’t prevent further aggressive interest rate hikes in the near term … it supports our view that inflation will drop back more quickly than Fed officials expect,” they wrote.

(Reporting by David Randall; Additional reporting by Davide Barbuscia; Editing by Ira Iosebashvili and Josie Kao)

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