• Sees risk of spillover into inflation
• No clear peak of wage growth seen yet

They need to play it this way in order to keep the door open to more rate hikes, or at least keep up that appearance. But for now, as the economy moves to the brink of a recession, the timing to tighten policy further would not be the best suited.

This article was written by Justin Low at www.forexlive.com.

At some point last week, it looked like the bond market rally was about to get going again. And then we got a turn on Thursday and Friday, and suddenly traders aren’t sure anymore that the rally would be a sustainable one. So, what’s the verdict right now as we get into the new week?

Things are looking more tentative as we await key US data releases in the coming days. The big one is the consumer price inflation report tomorrow but barring any surprises, there shouldn’t be much change to the Fed outlook right now.

Markets are anticipating the first rate cut at around June to July and that is actually not too much different from two months ago. In fact, the implied rate shown on the curve right now is higher than it was back then:

As much as it looks like traders are kicking back after months of angst amid the rout and selling, the fundamental picture hasn’t really changed. The Fed is still on course to keep interest rates higher for longer and there is still the risk of them doing more if inflationary pressures are not receding as much as they’d like heading into next year.

However, the key factor driving yields higher is arguably the flood of supply of Treasuries. And even though the quarterly refunding announcement was not as bad as feared, the trend is still set to continue. There will be more bonds coming into the market and that will make for more waves of supply in the months ahead. The Fed and US Treasury are not going to change that.

Taking that into consideration, there will always be a counter-force to keep the selling pressure in Treasuries and prop up yields.

Right now, it looks like we might be caught in a bind between 4.50% and 5.00% for 10-year yields as seen in the chart above. But the longer it takes for this latest rally to stamp their mark and break any significant levels, it seems that there will be an increasing likelihood that we get to revisit 5% yields again at some point in the weeks ahead.

I mean, 2-year yields itself are still hanging in there at 5.05% today. If anything, that shows the latest rally in bonds hasn’t really accomplished anything too notable just yet.

This article was written by Justin Low at www.forexlive.com.

The Dow Jones ended last week on a positive note as
we got a strong rally despite some concerning data. The University of Michigan consumer
sentiment report missed forecasts across the board by a big margin once again.
The bearish signs keep on accumulating with the recent hawkish tone from Fed
speakers and the softening labour market data with the big misses in the recent
NFP report
and the rising Continuing Claims. The
buyers should be very careful going forward.

Dow Jones Technical
Analysis – Daily Timeframe

On the daily chart, we can see that the Dow Jones last
Friday broke above the key trendline and the resistance around
the 34100 level. Given that it wasn’t supported by any bullish catalysts, this
breakout might turn into a fakeout, so the buyers must be extra careful going
forward.

Dow Jones Technical
Analysis – 4 hour Timeframe

On the 4 hour chart, we can see more closely the
breakout. In case we get a pullback into the broken resistance, the buyers will
likely step in with a defined risk below the resistance turned support and
target another extension to the upside. The sellers, on the other hand, will
want to see the price breaking below the support to confirm the fakeout and
pile in for a drop into new lows.

Dow Jones Technical
Analysis – 1 hour Timeframe

On the 1 hour chart, we can see that the Friday’s
rally is diverging with
the MACD which is
generally a sign of weakening momentum often followed by pullbacks or
reversals. In this case, if we get a pullback, the buyers should pile in around
the support, but if the price breaks below it, the reversal would be confirmed,
and the sellers will regain control.

Upcoming Events

This week we have some top tier economic releases. We
begin tomorrow with the US CPI report which is going to be one of the most
important events of the week. On Wednesday, we have the US Retail Sales and PPI
data, while on Thursday we conclude with the latest US Jobless Claims figures.

This article was written by FL Contributors at www.forexlive.com.

Major currencies are not doing much so far on the session as the overall market mood remains rather tentative to start the new week. Treasury yields are little changed while equities are displaying a more mixed picture in European morning trade. Regional indices are higher but playing catch up to Wall Street gains on Friday, while US futures are pointing lower as investors check back after the Moody’s downgrade on the US outlook after the close last week.

That is not leaving much for FX to work with, as the dollar sits little changed and more mixed at the moment. USD/JPY continues to hold just a touch higher at 151.73 while EUR/USD is also up 0.1% to 1.0688, though the latter is holding within just a 20 pips range today. Talk about a snoozer, eh?

It’s all about key US data releases coming up later in the week and I reckon we won’t get much action later today as well. The consumer price inflation report tomorrow is the big one to watch of course, as traders will use that as a guide to reaffirm any biases from last week.

For now, it’s shaping up to be a slower and diffident start to proceedings this week. Here’s the snapshot at the moment in FX (which is not much different from when we began the day here):

This article was written by Justin Low at www.forexlive.com.

• Prior +10.3%
• New yuan loans ¥738.4 billion vs ¥665.0 billion expected
• Prior ¥2.31 trillion

After a big jump in new loans at the end of Q3, there is a bit of a dip in October (likely seasonal factors) but it comes in above estimates. This is also still higher than the same period a year ago, which saw ¥615.2 billion in new loans then. Overall, it still shows that China is maintaining support for the economy as outstanding yuan loans are seen roughly 11% higher than October last year.

This article was written by Justin Low at www.forexlive.com.