The Morning Hark - 2 Aug 2023
Today’s focus... AAA, ADP, USD Seasonals, US Exceptionalism, and auctions
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USofA has lost its AAA rating as Fitch follows S&P in lowering their rating to AA+ (outlook revised to stable from negative). As stark as the headline reads, this risk was already apparent to the mkt during the debt ceiling crisis. We've consistently seen 5-10bps instant moves over NFP/CPI data releases during this Fed hiking cycle, so the overnight treasury moves are well within expected ranges, with 2s wider by ~2.5bps and 10s by ~6.5bps. As a result, we sit just below the double top of 4.08-10% in US10s. This is the key line in the sand for this week as US exceptionalism comes to the fore relative to the weakness in Global PMI's.
As "expected" as this rating downgrade can be, it comes at a pivotal time for the US Treasury ahead of the US Quarterly Refunding Announcements and tonight's auctions. Prometheus Research have released this mng a timely piece about the Treasury Issuance Impact. How will the mkt digest the almost $1.9 trillion of paper due to hit the street in H2? What clearing rate will the private sector be comfortable with to take down this long duration debt?
Yesterday the USD seasonals got going in earnest, something Brent Donnelly has been ahead of. Even after the "dovish" Fed and Politburo promises from China, his AM/FX pieces have captured this trend (Jul 27: It feels stupid to be bearish stocks, Aug 01: Strong ISM Strong USD).. follow his recommended reading channel on Harkster.
Overnight we've seen some USD consolidation (EURUSD stuck to 1.10, USDJPY back sub 143.00) which is a natural reaction to the US downgrade, but once again, the 40-50bps pullback takes some froth out of the USD trade and is well within expected ranges. If we look back on the chart in 1yr will we even notice the overnight USDJPY move relative to the 138-145 range the mkt has been gyrating through because of the BoJ tweak, tightening but not hiking, inflation is a supply problem, but we're going to buy unlimited bonds and we don't want JPY volatility.... sigh. It's not easy to thread the needle and keep everyone happy as a Central Banker.
DXY has remained firm on the week during the risk-off conditions, but weak US data releases and the downgrade have curbed the momentum for now. ISM data disappointed the high bar of expectations by only rising 0.4% to 46.4 whilst the ISM employment index fell further to a low of 44.4, mirroring the JOLTS data printing below expectations. Thus, today's ADP will be keenly watched for signs of cracks in the US labour mkt. Will we see a give back after the outrageously strong 497k print we saw last month as seasonal hirings, and a new methodology reset the scale? Either way, softness in ADP combined with the ISM employment index and the whisper number for Friday's NFP may well drift south (WHIS function on Bloomberg). A mkt coming into this week looking for US data to back up the US exceptionalism trade narrative as well as August seasonals will be on the backfoot even before we see the NFP print.
The fiscally fuelled US data has Atlanta GDPNow already forecasting 3.5% for Q3 relative to a German recession (one of the lowest PMI's in the world at 38.8), UK flirting with the 0 growth lower bound, Korean exports disappointing and, of course, Chinese data so weak the mkt has nothing else to do but expect sooner or later a fiscal push will be delivered.
Fed's Goolsbee (voter, dovish) said yesterday JOLTS data looks consistent with a strong labour market moving to a more balanced phase, and recent FOMC decisions have been "close calls" for him.
The US / NAFTA region is left as the only growth engine for the world… if it stalls, what happens next? The RoW growth is simply too weak to outperform the US. The only thing that can stall the US Exceptionalism story is the domestic data, but betting against the US economy has been a fools errand in 2023 .. why start now? The middle of the USD smile is very hard to find … unless we see a Chinese fiscal push combined with a soft landing in the US, we’re going to see DXY strength on risk aversion as we see a global slowdown/recession under the weight of higher real yields or we flip to the other side of the USD smile as US growth > RoW growth. The mkt pushes a softer USD narrative as the US soft landing appears, but this is different to a global soft landing, as the probabilities for a hard landing rise in Europe. Are the deteriorating economic conditions in Sweden and New Zealand harbingers of what is to come in the Eurozone and UK?
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All times in British Summer Time (BST)
US (12:00): £0yr Mortgage Rate
US (12:00): MBA Mortgage Applications
US (13:15): ADP
US: Treasury Quarterly Funding Announcement
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