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Summary
- Since peaking above 108 (intra-day) on 22 November, the US dollar Index (DXY) moved below 106 one week later and now trades just above 106, about 1.75% lower than that recent peak.
- Moves in US yields have been similar, with the 2-year yield now about 25bp off its peak two weeks ago and the 10-year over 30bp lower than in mid-November.
- High uncertainty surrounds tomorrow’s US nonfarm payrolls (NFP), leaving the rates and FX outlook unclear.
Market Implications
- We stand aside and await clearer signals in the FX and US rates spaces post-NFP.
DXY Has Pulled Back From Its Recent Two-Year High
DXY rallied about 8% from 30 September to 22 November. Since then, however, technicals, the (partial) Trump rally unwind, and a drop in US yields have pushed DXY about 1.75% lower (Chart 1).
US Yields Drop Has Coincided With DXY Pullback
US Treasury (UST) yields have seen similar price action across the curve.
After hitting its Q4 intraday peak on 22 November, the 2-year UST yield has pulled back about 25bps (Chart 2).
Similarly, the US 10-year yield has fallen about 30bps since trading at its Q4 intraday high on 15 November (Chart 3).
NFP Now Critical for USD and US Yields
This leaves USD and the US rates market finely poised ahead of the US jobs report tomorrow, with expectations for the print varying significantly. A weaker-than-expected print would see an additional drop in DXY and UST yields, while a beat would see both reverse higher.
Monthly US Job Growth Set to Decline
Dominique recently dove deep into NFP, highlighting the end of the recent immigration surge as a catalyst for lower monthly NFP numbers.
Recent NFP prints and pre-pandemic Congressional Budget Office projections suggest sub-100k NFPs could be the new normal now the immigration surge has ended.
Moreover, Dominique predicts a large negative surprise at the 6 December NFP release, which would rekindle recessions fears and expectations of Fed cuts.
December NFP May Still Be Very Buoyant
I find her argument compelling. Nonetheless, the timing of the passthrough from the end of the immigration surge into NFP remains uncertainty.
Meanwhile, Sam’s monthly NFP model, which analyses trends in analysts’ forecasts to predict upcoming prints, predicts a beat of 277k vs 215k consensus.
Our NFP model has performed consistently well this year. Since inception (January 2024), the average absolute error ranks us in the top 10 analysts on Bloomberg. We are fourth over the last two months.
Caution Is Required in This Tricky Period
Given the conflicting signals from fundamentals and our forecasting model, the uncertainty is too high to carry any large positioning into tomorrow’s NFP.
If Dominique is right and the number is very soft, we expect a sharp drop in DXY and UST yields. But if Sam’s model is right, we will probably the drop in USD and UST yields unwind and trade higher.
We must consider all this in the context of the Fed’s rate decision on 18 December. Currently, the market leans towards another 25bps cut, pricing in about 19bps of easing into this next meeting.
We expect a slight, potential asymmetry emerging.
If the NFP print is stronger, we think the market will probably not allow yields to rise aggressively.
The Fed looks set to cut on 18 December, as Dominique has argued and reiterated.
Christopher Waller’s Fed speech this week also seemed to strongly hint a 25bps cut on 18 December.
This should keep market pricing that next Fed cut near current levels and contain any yields rise (especially in the short end).
However, the asymmetry is not skewed enough for us to initiate positioning ahead of tomorrow’s NFP.