US 10Y Yields Sink – Dollar Dented From all Sides

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Market Drivers June 3, 2019
US 10Y yields sink
UK PMI misses
Nikkei -0.92% Dax -0.52%
Oil $53/bbl
Gold $1314/oz.

Europe and Asia:
EUR EU Final PMI 47.7 vs. 47.7
GBP UK PMI Manufacturing 49.4 vs. 52.3

North America:
CAD Mannufcaturing PMI 9:30
USD ISM Manufcaturing 10:00

The relentless collapse in US yields saw no pause at the start of week’s trade with US 10 year rates plunging below the 2.10% level to hit a low of 2.06% in early London trade. The move sent the dollar lower against both the high yielder and the low yielders as the greenback sank against the yen and Swissie as well as Aussie and kiwi.

The angst in bonds is driven by investor fears over the new front in the trade war that Trump opened up against Mexico. So far the collapse in bond yields has not translated into a similar decline in stocks. Although equities have declined for six straight weeks, the correction has been slow and contained and panic has not really hit Main Street.

Part of the reason of course is that the decline in yields has made equities more attractive on a relative basis providing an underlying bid for stocks, but it the correlation starts to decouple as equity investors begin to fear the onset of a recession due to the collapse of business confidence and curbed demand due to higher prices from the trade war the selloff in equities could quickly exacerbate and tighten monetary conditions to the point where the Fed may have no choice but to cut rates faster than market expectations. Right now rates markets are pricing the prospect of a rate cut in September but a several thousand point collapse in the Dow could bring action much sooner than that.

For now, the dollar remains under pressure from all sides even though other central bankers are expected to turn to accommodation as well. Tomorrow the RBA Is projected to cut rates by 25bp and the ECB later this week will address the issue of TLTRO and its own curbing of QE program given the fact that conditions have materially declined in the Eurozone.

The slowdown in economic activity in Europe was reinforced by the latest eco data from UK and EZ. EZ final PMI reading saw no bounce at all as the report printed at 47.7 vs. 47.7 eyed – firmly in contractionary territory. In UK the PMI Manufacturing data surprised to the downside printing at 49.4 vs. 52.4 projected falling below the 50 boom/bust level for the first time in more than 3 years. New order and employment both declined and stockpiling activity was halted after Brexit was delayed. The news should only increase concerns about UK economic growth going forward and while the multiple candidate election for Tory leadership continues to center on who can lead to a harder Brexit, the broader UK political climate has shifted towards Remain and if the turbulence amongst the Tories continues UK may face a snap election with Liberal Democrats likely getting benefit of the centrist vote that could ease market fears about a non-negotiated exit for UK. Last week cable may have set its near term lows around the 1.2500 figure and if it can remain above 1.2600 for next few day a short covering squeeze back to 1.2800 is likely.

Into North American open today the big eco event of the day will be the ISM Manufacturing report which will be watched with particular focus after last week’s sharp decline in flash US PMI readings. The ISM data is expected to print at 53.0 – a bit higher than last months 52.8 reading. Any upside surprise would be seen as a relief though it remains to be seen just how much of bump the dollar will get given the new set of concerns on tariffs against Mexico. If however ISM prints sharply lower – breaching the 51 figure, the drop in the dollar could take greenback below the 108.00 figure in USDJPY for the first time since the fat finger trade at the start of the year.

Boris Schlossberg
Managing Director

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