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Summary
- US yields across the curve are at or near their year-to-date (YTD) highs, as are the USD Dollar Index (DXY) and most G10 USD pairs.
- At such levels, we would normally position for retracement lower.
- However, Friday’s US non-farm payrolls (NFP) report presents major event risk.
Market Implications
- We wait for price action post-NFP before initiating positioning in US rates or G10 USD pairs.
Across the Curve, US Yields Are Soaring
Since bottoming in late January/early February, US yields across the key bellwether maturities have risen. Most are now at or very near YTD highs.
The 2-year yield, which printed its 2024 high on 18 March, currently trades within 5bps of that level, near 4.75%.
Chart 1: Orange Line = 2-Year US Yield
The 10-year yield, which until this week traded in a ~3.9%/~4.3% range so far this year, currently trades at a new YTD high near 4.4%.
Chart 2: Orange Line = 10-Year US Yield
Like the 10-year, the 30-year yield also broke above its ~40bp YTD range this week, now trading at a 2024 high just above 4.5%.
Chart 3: Orange Line = 30-Year US Yield
The USD Trades Very Near YTD Highs
These higher US yields have driven the steady USD rise in 2024.
The DXY printed its YTD high earlier this week and, after sliding in Q4 2023, now trades ~2.8% higher.
Chart 4: Orange Line = USD Index Spot Price
USD/JPY has also rallied impressively this year, outpacing the broader USD index, up about 7.5% YTD, hovering near a multi-decade high.
Chart 5: Orange Line = USD/JPY Spot Price
Although EUR/USD has been stuck in a ~1.05/~1.11 range for the past six months, it is down ~1.75% YTD.
Chart 6: Orange Line = EUR/USD Spot Price
US NFP Tomorrow Is a Major Event Risk
The expectations are for a mixed NFP tomorrow. The consensus is for the headline number to be weaker in March than in February (213k vs 275k), with the unemployment rate also expected to tick lower (to 3.8% in March vs 3.9% in February).
Average hourly earnings are expected to be stronger MoM (0.3% in March vs 0.1% in February) and weaker YoY (4.1% in March vs 4.3% in February).
As ever, NFP is a material event risk. We can expect volatile price action and potentially outsized market moves around it.
Stand Aside and Monitor Price Action
With US yields at YTD extremes and the USD near 2024 highs, markets are finely poised ahead of tomorrow. Ordinarily at such levels, we would position for a retracement lower.
After all, the Fed still has 75bps of rate cuts as the base case for this year, and the market is now pricing only about 70bps of Fed easing for 2024. Yields have risen, quickly.
The pace and strength of the rise in US yields gives us pause, however.
Although a disappointing NFP tomorrow could see US yields and the USD trade lower, the US jobs report has many moving parts. We would not wholly rely on a dovish outturn to guide positioning considerations.
Moreover, even if US yields retraced tomorrow, we think the market would use this pullback to add to short positions, as the recent rise in yields appears to have solid conviction behind it.
As such, we prefer to be cautious heading into tomorrow’s NFP.