September Week 4, Looking Back and Looking Forward

Bond Yields in Focus as Economic Data Takes a Backseat

Looking back to September week 4, bond yields took precedence over economic data, a trend that is likely to continue into the upcoming week as they retreat, potentially influencing forex markets. Notable events on the calendar include the NFP and ISM PMI reports, RBA and RBNZ monetary policy meetings, the quarterly Tankan survey for Japan, and Canada's employment report.

Volatility in US Bond Yields and USD Strength

The past week witnessed a surge in US bond yields, primarily in the long end of the curve, leading to a bear steepener. Various factors, including higher oil prices, hawkish Fed comments, and concerns about a US government shutdown, fueled the bond rout and pushed the US dollar to year-to-date highs. Market dynamics played a role in allowing risk assets to recover some losses as profit-taking triggered a pullback in the US dollar and yields.

Key Events and Themes in the Week Ahead

Looking forward, the week ahead promises to be eventful, with a focus on USD strength and the ongoing bond rout. Major events include US employment reports (Nonfarm payroll, JOLTS job openings, jobless claims), ISM manufacturing and services PMI data, Canadian employment figures, Japan's Tankan survey, and the RBA and RBNZ cash rate decisions. Additionally, China's PMIs will be closely watched, although trading volumes may be impacted by China's public holiday.

Mixed Signals in US Economic Data

US economic data can be divided into two main categories: employment and business surveys. Business surveys, such as PMIs, indicate a softening economy, with the possibility of contraction. In contrast, employment data shows a mixed picture, with job growth trending lower but remaining healthy, unemployment rising but remaining historically low, and job openings falling but still elevated. This divergence between employment and business surveys may further influence the bond market and the US dollar.

RBA and RBNZ Policy Meetings and Market Expectations

The RBA and RBNZ policy meetings are on the horizon, but it's unlikely that either central bank will make significant changes. Market expectations of a 25bp RBA hike by June 2024 have risen due to increasing bond yields. However, the RBA may hesitate to confirm this given signs of lower household spending and retail sales. The RBNZ, on the other hand, is expected to change policy as their forecasts confirm a peak rate of 5.5%.