(Original title: The Federal Reserve’s most aggressive interest rate hike cycle in the past 40 years has finally come to an end? U.S. bonds and risk assets have surged across the board, and the U.S. dollar index has suffered its largest weekly decline since July… But the market may be happy too early)
As the U.S. job market cools further, expectations that the Federal Reserve’s most aggressive interest rate hike cycle in the post-“Volcker era” will officially end have also increased significantly. Now, the continued fall in the job market has provided room for the Federal Reserve to keep interest rates unchanged next month and strengthened the view that the Fed is ending its interest rate hikes. Against this background, the market fell into a “carnival”: risk assets surged across the board, U.S. bond yields and the U.S. dollar both plummeted, and the monthly U.S. bond index finally rebounded after “six consecutive negative days.” In addition, emerging market currencies, which have been oversold in recent months, have also rebounded.
Data released by the U.S. Bureau of Labor Statistics on Friday (November 3) showed that U.S. non-farm employment increased by 150,000 in October, significantly lower than the expected 180,000. The number of new jobs in September was revised down from 336,000. to 297,000, which means that the number of new jobs created in October was only half of the number of jobs created in September. The U.S. unemployment rate in October was 3.9%, rebounding from expectations and the previous value of 3.8%, and hitting a new high in the past two years.
Despite this, many market participants ignored a core part of October’s non-farm payrolls data: the strike in the US auto industry. Jeffrey Young, former head of foreign exchange at Citigroup and co-founder and CEO of DeepMacro, also pointed out in an interview with a reporter from the “Daily Economic News” that although the U.S. non-farm employment declined modestly and the Federal Reserve’s policy statement last week was more Neutral rhetoric should provide support for risk assets, but the decline in non-farm payrolls in October was due to the (auto industry) strike, and these workers will return to the labor market in November with the outcome of negotiations for a large pay increase, which will This means that there are still upward risks to inflation.
The bond market is “carnivaling”, and bulls are welcoming the dawn after the U.S. bond index’s monthly line is “six consecutive negative days”
Last Thursday (November 2), Beijing time, the Federal Reserve FOMC suspended interest rate increases for the second consecutive time and continued to maintain the federal funds rate at a 22-year high of 5.25% to 5.50%. After the policy statement was released, Fed Chairman Powell said it was an open question whether the Fed needed to raise interest rates again and that the Fed was “proceeding with caution.” Bloomberg reported that such language usually indicates that the Fed is unwilling to raise interest rates in the short term.
Powell also said supply and demand conditions in the labor market are rebalancing, citing slowing job growth and rising labor force participation. Yelena Shulyatyeva, senior U.S. economist at BNP Paribas, also said, “The data shows that the U.S. labor market is cooling. As people’s working hours enter the fourth quarter, people’s working hours have been significantly reduced, and wage growth has slowed further, which will make the Fed’s meeting next month difficult. Be patient and beyond.”
Some people believe that the Fed’s suspension of interest rate hikes is essentially the result of a trade-off between macro stability and financial stability. “Daily Economic News” reporters noted that since July, as the core inflation in the United States has risen moderately for three consecutive months, the degree of overheating of the labor market has decreased, the inflation trend has been better suppressed, and the pressure on the Federal Reserve to fight inflation has been significantly eased. The urgency for aggressive interest rate hikes has diminished.
After the release of last Friday’s non-farm payrolls report, optimism that the Federal Reserve was ending its most aggressive interest rate hike cycle in nearly 40 years quickly spread to the bond market: the 30-year U.S. Treasury yield plummeted nearly 40 basis points in just three days. , the largest three-day decline since the outbreak of the new coronavirus pandemic in early 2020. Previously, as of October this year, the U.S. debt index had recorded “six consecutive negative months” on a monthly basis. Now the rebound in U.S. debt means that U.S. debt bulls are finally seeing the light of day.
The 30-year U.S. bond yield hit its biggest three-day drop in nearly four years. Image source: Bloomberg
Last week was a crazy week for traders in the bond market. In addition to rising expectations for the Federal Reserve to end interest rate hikes, which led to a surge in U.S. bonds, the U.S. Treasury Department announced a smaller-than-expected bond supply plan, which also contributed to the rise to a certain extent. U.S. debt. Last Friday (November 3), the yields on 2-year to 10-year U.S. Treasury bonds fell by more than 10 basis points.
Thomas Simons, U.S. economist at investment bank Jeffreies, believes that the drop in U.S. bond yields last week shows that traders have become more convinced that the Federal Reserve has room to pause raising interest rates again next month.
For bond market traders, Friday’s non-farm payrolls report is key evidence that the Fed has room to further keep interest rates on hold next month and begin preparations for a rate cut next year. CME Group’s “Fed” observation tool shows that as of press time, futures traders believe that the probability of the Fed keeping interest rates unchanged in the middle of next month is more than 90%, and the probability of raising interest rates by 25 basis points is less than 10%.
Image source: CME Group
At the same time, the futures market currently predicts that the Federal Reserve will maintain the current interest rate of 5.25% to 5.50% until May next year, and officially enter the interest rate cut cycle at the meeting at the beginning of that month, and the expected rate cut next year is currently as high as 100 basis points. In other words, the U.S. federal funds rate will return to the range of 4.25% to 4.50% by the end of next year.
Image source: CME Group
The U.S. dollar index suffered its largest weekly decline since July. Is there an opportunity for Asian emerging market currencies?
The U.S. dollar also sold off, driven by expectations that the Federal Reserve will end its rate hikes and shift to lower rates. The U.S. dollar index fell 1.02% last Friday to a new low since September 19, and the daily line recorded “three consecutive negative days”. The U.S. dollar index fell 1.42% on a weekly basis last week, the largest weekly decline since the week of July 14 this year. Although the U.S. dollar index is still up about 1.5% on the year, it has fallen about 2% from the year’s high hit in October.
The U.S. dollar index fell below the 50-day moving average for the first time since August. Image source: Bloomberg
Strategists and market option positions have been signaling that the dollar’s bull run is about to cool down as employment data for the U.S. economy slips and growth weakens in Europe and elsewhere. Kit Juckes, chief foreign exchange strategist at Societe Generale in London, said, “The data in the United States is relatively weak, but the situation in other parts of the world is not much better, so the dollar is likely to fluctuate in a range.”
After the release of the U.S. Treasury’s quarterly refinancing report, the Federal Reserve’s resolution and non-farm payroll data last week, the continued decline in U.S. bond yields became a key factor suppressing the U.S. dollar. Changes in bond yields caused the U.S. dollar to gain interest relative to other non-U.S. currencies. The gap advantage narrowed significantly. Morgan Stanley strategists James Lord and David Adams began advising clients to exit long U.S. dollar positions late last month.
As the U.S. dollar falls sharply from its highs, many market participants have begun to turn their attention to emerging market currencies. For some Asian currencies, some indicators are already reflecting early optimism. In the options market, traders were the least bearish on currencies such as the Chinese yuan, Indian rupee and South Korean won, according to three-month risk reversal data compiled by the industry.
Derek Halpenny, head of global market research at Mitsubishi UFJ Financial Group, pointed out in an email to a reporter from the Daily Economic News, “We have previously pointed out that the window for further strength in the U.S. dollar is still open, but last week may have marked the closing of this window. . Of course, after last week’s events, we are already much less confident that the dollar will be stronger again. We will need to see more examples of bullish U.S. data to draw more firm conclusions, but the dollar is rising again New highs since the start of the year are no longer our core forecast. While we may no longer believe the U.S. dollar has room to reach new highs, we don’t think many currencies can rise significantly. The currencies that have depreciated significantly since the summer Currencies, or emerging market currencies with the best arbitrage capabilities, may offer the best opportunities in the short term.”
“Market participants have become increasingly confident that the G10 central bank interest rate hike cycle is nearing its end. Recent policy statements from the Federal Reserve, European Central Bank, Bank of England and Bank of Canada have reinforced this view. Last week’s Fed The policy statement and Powell’s speech sent Treasury yields and the dollar tumbling, and fueled a rebound in stocks. After failing to truly break through the 5% level last month, the 10-year Treasury yield has now fallen back to last month’s lows. point, to a level slightly above 4.50%. This is creating a more favorable environment for foreign exchange arbitrage trading. Implied volatility indicators for G10 and emerging market currencies have fallen to new lows since the beginning of the year, continuing to approach the level of Russia and Ukraine in March last year Pre-conflict levels. Against this backdrop, we believe the main beneficiaries will be higher-yielding emerging market currencies such as the Mexican peso,” said Derek Halpenny.
It should be pointed out that although the market has begun to end the expected interest rate hike spree by the Federal Reserve, in stark contrast, more and more asset management companies have warned that if the U.S. economy continues to expand, U.S. bond yields will A retest of recent highs not seen since the global financial crisis is likely. Federal Reserve officials and traders are also paying close attention to data to be released in the near future, including the University of Michigan’s inflation forecast to be released on Friday and the October CPI to be released on the 14th. If inflation rebounds, that could give the Fed reason to raise interest rates further. Richmond Fed President Barkin said that although the latest non-farm payrolls report is a welcome sign that the job market is normalizing, his view on whether to raise interest rates again will depend more on the future trend of inflation.
Jeffrey Young, former head of foreign exchange at Citigroup and co-founder and CEO of DeepMacro, also pointed out in an interview with a reporter from “Daily Economic News” that despite the mild decline in U.S. non-farm employment and the more neutral rhetoric of the Federal Reserve, That should provide support for risk assets, but the decline in non-farm payrolls in October was driven by strikes (in the auto industry), and these workers will return to the labor market in November with negotiations for significant pay increases. “This means that there are still upward risks to inflation, and even if the Fed feels the urgency to raise interest rates has decreased, officials will have to pay close attention to inflation.” Jeffrey Young pointed out.