US ISM tumbles; G3 yields in flux
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.
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%).
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