US ISM tumbles; G3 yields in flux

G3 rates in flux. US ISM manufacturing falls. RBA eases.
Wei Liang Chang, Eugene Leow02 Oct 2019
    Photo credit: AFP Photo

    FX: US ISM tumbles
    The  US ISM manufacturing index tumbled to its lowest level since Q2 2009. The employment sub-index also came in below 50 for a second straight month, which may start weighing on non-farm payrolls. President Trump was quick to pounce with yet another tweet criticizing the Fed for keeping rates too high and allowing the USD to be too strong, piling pressure for the Fed to ease more substantively.

    The increasingly challenging US growth outlook has led to a dovish repricing of US rate expectations, triggering a sharp pullback in the USD against both EUR and JPY. In Asia, we are more concerned over reflexive capital outflows that could pressure IDR and INR, due to their current account deficits.
    Meanwhile, the RBA cut rates again yesterday, bringing its policy rate to a new low of 0.75%. While the Bank sees the economy as having reached a "gentle turning point", it remains concerned over prospects of slow employment gains and subdued wage growth. AUD/USD has tumbled to 0.67 in the wake of rate cut,  pressured by a somewhat dovish tone yesterday, as RBA maintains that it is prepared to ease further if needed.
    Rates: G3 yields in flux                

    Yesterday’s price action highlights the dilemma for the bond market as G3 yields spiked in the first half of the day before giving up gains subsequently. Reports that the Bank of Japan (BOJ) may be concerned about an overly flat curve, weak auctions and signs that Japan’s Government Pension Investment Fund (GPIF) may be allocating more to foreign portfolio investments drove 10Y JGB yields up by 6bps. The resultant spillover unto German Bunds and US Treasuries was significant as DM curves bear steepened. However, this was overshadowed by ISM manufacturing figures that missed expectations (actual: 47.8, consensus: 50.0). 10Y US yields closed at 1.64%, down from its intraday peak of 1.75%.

    The sizable intraday volatility highlights the risks of holding govvies at these depressed yield levels. Pushback from policy makers or any signs of portfolio re-allocation away from bonds can trigger outsized moves across the DM space. Unfortunately, the reverse is also true. US yields appear sensitive to weakness in US data. While the global manufacturing slowdown is well entrenched (and also impact the US), there are lingering worries that the US’s services sector and consumers could start to wobble. Tonight’s ADP employment and Friday’s payrolls would provide more clues as to how the broader economy is holding up. Meanwhile, short-term USD rates are now expecting an October cut (63%).

    Chang Wei Liang

    Credit & FX Strategist

    Eugene Leow

    Rates Strategist - G3 & Asia

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