Morning Commentary: Near Term Saturation Point?

Foreign Exchange - Morning Commentary
Near Term Saturation Point?
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
We appear to have reached a near term saturation point in terms of how much good news the market has already priced in. This takes into account all the surprisingly strong U.S. economic data points from last week and all the optimism surrounding a breakthrough deal on trade between the U.S. and China hopefully to be signed this month. The bond market has consistently been a better barometer for reflecting market sentiment and judging the state of the U.S. and global economy; G7 interest rates are correcting lower today after powering ahead for three straight days. Global equities remain positive overall and the U.S. dollar is consolidating after strong gains over the past two days.

Taking a longer view, market sentiment has improved measurably over the past weeks and months and from a year ago. Yield curve inversion maxed out in early September with the U.S. 3-month versus 10-year yield in negative territory by nearly 55 bps; today, that number sits at positive 27 bps. U.S. 10-year yields were sitting at 1.43% in early September and are now up by nearly 40 bps at 1.83%.

The risk of recession continues to inch down as market conditions and sentiment improve. Today, the Bloomberg Economic model indicates the probability of a recession within the next 12 months at 26%. That has been steadily falling from the near panic environment one year ago when the odds of a recession were sitting at nearly 50%. There remain numerous reasons to continue to keep a close eye on the economy and political events but less reason to be anxious. Here's to hoping that the momentum that has been generated over the past weeks and months continues to power the longest U.S. economic expansion in history ahead.
  • New Zealand’s jobs report for Q3 came in near expectations as the economy appears to be stabilizing. Job growth increased by expectations at 0.2% for Q3 and the labor force participation rate beat expectations at 70.4%. The UR did rise above expectations to 4.2% from the 3.9% in the previous quarter. NZ interest rates are unchanged on the session as is the Kiwi.
  • The Bank of Thailand cut rates by 25 bps to 1.25% as expected. This is the second cut this year and brings interest rates to a record low. Two of the five voting members voted against the move. The Thai baht (THB) continues to outperform its Asian peer group by nearly 7.5% this year and has appreciated by nearly 15% since the end of 2016.
  • U.S. nonfarm productivity for Q3 unexpectedly fell by 0.3% against expectations of a gain of 0.9%. This was the first decline in nonfarm productivity since 2015. Part of the explanation for the negative print was a steep rise in wages from the 2.6% level in Q2 to 3.6% in Q3. Unit labor costs were up by 3.1% YoY, the fastest increase since 2014.
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