A daily summary and commentary of events and factors that affect the global markets, with a particular emphasis on the foreign exchange markets.
Mr. Powell, It’s Your Turn
Share this story:
David Atkinson Foreign Exchange Sales Manager
Yesterday we discussed how the U.S. 10-year yield is having cascading effects throughout emerging markets (EM). Today, developed markets will be more in focus, primarily with Federal Reserve Chair Jay Powell appearing on a Wall Street Journal webinar at noon Eastern time today. This is billed as a “jobs summit,” and Chair Powell will surely use the slack in the labor market to justify the Fed’s dovish stance for years to come. He has plenty of data to back him up on that, with disappointing ADP jobs data today and today’s initial jobless claims of 745,000 — just nearly on the nose of expectations for 750,000.
Markets will also be looking for how the Chair Powell will address those rising 10-year bond yields as well as short-term rates that are actually too low for the Fed’s comfort. Another version of “Operation Twist” is being bandied about a lot these days, with the Fed selling short term and buying long term to try to tweak the short end of the curve up and the long end down. Of course, the Fed storyline has been that the backup in the long end is due to economic growth, so why be concerned about it?
Taking this story out of the U.S. though, markets are taking note that the yield differential between U.S. rates and German bunds is widening. The same is true with U.S. yields and those of Japanese Government Bonds (JGBs). This has put a bid in the U.S. dollar index the last couple of days. Interestingly, this seems to be playing right through major currencies and settling in with those EM currencies we were discussing yesterday.
The other event of the day is an OPEC meeting today. Markets are expecting some increase in supply next month, but there are news reports out that are throwing cold water on that speculation. If true, it could mean that OPEC, and Saudi Arabia in particular, would hold back on supply to the market until it felt certain that a global economic recovery in a post-COVID-19 world really will occur. This would tend to keep oil prices elevated, which could feed into inflation expectations and into long-term bond yields, and the snowball would continue from there.
Finally, there is an interesting FX cross rate than tends to absorb all these factors — the Australian dollar (AUD) versus the Japanese yen (JPY). AUD is up over half a percent today. This pair can be seen in many different shades of market sentiment. Australia is a commodity-rich country, while Japan has to import most of its energy supplies. This is also a sign of risk sentiment, with the reopening expectation sending capital Australia’s way, as that is one place where the global supply chain starts. This then supports an evolving carry trade in which investors borrow in low-yielding JPY and fund AUD capital projects.
In any event, it will be another interesting day. Have a good one.
Want to learn more about international finance, economics, and global events? Sign up for our other Foreign Exchange emails and videos!
Follow City National Bank on social media:
Non-deposit investment products:
Are not FDIC insured,
Are not deposits or other obligations of City National Bank and are not guaranteed by City National Bank, and
Are subject to investment risks, including possible loss of the principal invested.
This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. City National Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.
Now accepting scholarship apps Celebrating 40 years of service -- A loan to an innovative company -- Affording your dream home -- Mergers and a new branch in Raleigh View this email in your browser Forward to a friend
Your Market News update for May 30, 2019 | View online Market News News that's moving the market now As Trade-War Worries Linger, Market Seems to Lack Buying Conviction May 30, 2019 8:40 AM | JJ Kinahan 6 min read | Daily Market Update