USD Rates: Closer, but not quite time for a pivot
Elevated market volatility over the past week has led to some speculation that the Fed might pivot. We think that it might be a tad early to call this. To be sure, financial market stress was particularly acute late last week. Couple that with stretched positions on UST and Equity shorts) that have been built for some time, there was a large price adjustment across assets that probably cleaned out these trades. As financial conditions improved and US data proving mixed, this has allowed yields to stage a moderate bounce last night. 10Y yields are now about 3.75%, compared to a peak of 4.02% on 28th September and a low of 3.56% on 4th October, underscoring the still volatile landscape for USD rates.
Interpreting Friday's NFP would need to be nuanced. The selloff in DM govvies last night was initially driven by EUR rates and followed through when US's ISM services proved resilient (actual: 56.7, consensus: 56.0). This contrasts with manufacturing figures which were weaker and pointed to cooling price pressures. Much was also made about the 1mn fall in JOLT job vacancies in August. We would be cautious interpreting these figures as revisions could be sizable and this print lags by two months. In any case, a sustained fall in job openings should be seen as a positive step towards a Fed pivot. If labour market participation also ticked up, labour market tightness should ease. Unfortunately, this means that the headline NFP figure might not provide a clear picture. If ADP employment figures are a guide, a reasonably strong NFP print looks likely (consensus: 260k). Taken together, data thus far does not seem sufficient to tilt the Fed to a pivot yet, but we are getting closer. Jitters over duration is still significant with implied volatility in rates hovering near the recent high. We think 10Y yields close to the 3.8-4.0% range is a good tactical receive. For the 5Y tenor, our reference range is 4.1-4.2%. We still think the 5Y is too cheap (yields too high) compared to 2Y and 10Y tenors.
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