US treasuries jolted by payrolls; USD finds support


Stronger US jobs data will, at this week's congressional testimonies, strengthen Fed Chairman Powell’s hand in taming aggressive Fed cut bets.
Philip Wee, Eugene Leow, Joanne Goh08 Jul 2019
    Photo credit: AFP Photo


    Rates: US payrolls wakeup call

    Friday's payrolls were better than expected (actual: 224k, consensus: 160k), jolting US Treasuries. US yields were up 7-9 bps across all tenors as market participants had a re-think about the probability of Fed cuts this month. Ahead of payrolls, the market was pricing in between 1-2 Fed cuts in July. We thought that the USD rates space was overly complacent on Fed cuts (see Macro Strategy, 2nd July) and was vulnerable to a squeeze higher if payrolls (a historically volatile series) surprise on the upside. With the immediate threat of China-US trade war out of the way, the urgency for Fed cuts has waned. At this point, the market is still fully pricing in a cut by July but bets of a 50 bps reduction have been removed.

    Given these developments, we think that the odds for a July cut are probably closer to 50-50 and short-end USD rates might drift modestly higher in the coming few weeks. It is important to distinguish between insurance cuts (2-3 cuts) and recession cuts (four or more). At this point, it is too early to say that a recession is imminent. We do not think that the market will remove Fed easing expectations even if the data proves strong. With China and Eurozone numbers still lacklustre, guarding against downside risks is probably the priority. In any case, we think that upside to longer term USD rates may be limited as long as the European Central Bank (ECB) keeps policy ultra-loose.

    FX: USD supported ahead of Powell testimony; GBP worried about hard Brexit

    Fed Chairman Jerome Powell’s semi-annual congressional testimonies on July 10-11 will be important for the US dollar. Last Friday’s stronger-than-expected US nonfarm payrolls for June (224k actual vs 160k consensus) propelled the DXY to 97.2 from its 96 low on June 24. The sessions will also be an opportunity for Congress to stand behind the Fed’s independence and to insulate the institution against short-term political interests. If asked, Powell will reiterate that it is not the Fed’s job to weaken the US dollar but to achieve its “price stability, full employment” dual mandate. Hence, the recent upside surprises in in US data and the China-US tariff ceasefire should support the Fed’s case for “insurance cuts” against global headwinds and not “a rate cut cycle” against recession risks. What the US dollar bears fear most is probably a signal from the Fed that it will be patient on cuts in favour of keeping the powder dry.

    According to YouGov, Boris Johnson is leading 74-26% in the Conservative Party leadership contest to become Britain’s next prime minister later this month. Most of his supporters believe that Johnson is more determined than Jeremy Hunt to lead the UK out of the EU without a deal on October 31. The reason alone is enough to keep the British pound on its depreciating path towards its post-2016 referendum low of 1.20. To avoid a disorderly Brexit, UK needs EU’s support to renegotiate the deal or work on a new deal, or another request to delay Article 50. Brussels has, however, responded to Johnson’s pledge to take UK out of EU with or without a deal with its “withdrawal agreement or nothing” stance. Unless both sides break the deadlock, UK lawmakers will struggle to overcome the legal default position of a no-deal Brexit.

    Equities: Selective approach warranted to Asia markets

    As weak US economic data have bolstered expectations that the Fed will cut rates, we believe equity markets will continue to focus on monetary easing till the first rate cut occurs. We think it is likely to be in September as the US data are just not weak enough to justify a rate cut as yet. However, before Friday, Fed futures are already almost pricing in a 100% chance of a rate cut in the next Fed meeting. The tussle between growth and rate cuts will likely drive investors to rotate between the two benefitting groups – export-oriented or domestic-demand economies / sectors. After Friday’s strong non-farm payrolls report, we believe the markets of South Korea, Taiwan, and Thailand could see some relief.

    Eugene Leow

    Rates Strategist - G3 & Asia
    eugeneleow@dbs.com

    Philip Wee

    FX Strategist - G3 & Asia
    philipwee@dbs.com

    Joanne Goh

    Regional Equity Strategist
    joannegohsc@dbs.com

    The information herein is published by DBS Bank Ltd and PT Bank DBS Indonesia (collectively, the “DBS Group”). It is based on information obtained from sources believed to be reliable, but the Group does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation & the particular needs of any specific addressee. The information herein is published for the information of addressees only & is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Group, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Group or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Group & its associates, their directors, officers and/or employees may have positions or other interests in, & may effect transactions in securities mentioned herein & may also perform or seek to perform broking, investment banking & other banking or finan­cial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Sources for all charts & tables are CEIC & Bloomberg unless otherwise specified.

    DBS Bank Ltd., 12 Marina Blvd, Marina Bay Financial Center Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E.

    PT Bank DBS Indonesia, DBS Bank Tower, 33rd floor, Ciputra World 1, Jalan Prof. Dr. Satrio Kav 3-5, Jakarta, 12940, Indonesia. Tel: 62-21-2988-4000. Company Registration No. 09.03.1.64.96422.