The dollar remains very well bid and has rallied around 7% from its low point in mid-July. Corrections have been few and far between - largely because of a confluence of factors. At the heart of it is strong US growth and a Federal Reserve that is showing no signs of letting up its hawkish rhetoric. And increasingly, the market is building the view that the next Fed easing cycle - whenever it comes - will not be the kind of 300-400bp affair we have been used to over prior decades. This has lifted the market pricing of the low point for the next Fed easing cycle - priced in around three years - to 4.29%. This was just at 3.99% last Friday and around 3% in the spring. This has been a key factor driving long-end US rates higher. 5.00% on the US 10-year Treasury yield is the bias from our rates strategy team.

At the same time, higher crude oil prices, as Saudi supply cuts keep the market in deficit, are driving a renewed wedge between the 'haves' - the US - and the 'have nots' - Europe and Asia. Our commodities team sees the risk that Brent crude briefly spikes above $100/bbl.

Add in developments in Europe and China, and one can see why the high-yielding dollar remains in demand. For Europe, we would highlight two new euro negatives this week - Italy pushing the budget boundaries and some European Central Bank officials discussing large rises in Minimum Required Reserves. And in China, the news out of the property sector remains bleak.

We have been saying for a while that a softening in US activity data is required to turn the dollar around. But because of the poor investment outlook overseas, that bar for poor US activity data is now higher. On that subject, today sees the weekly jobless claims. These have been really robust. We also see the 3Q23 PCE deflator.

In theory, a US government shutdown should be slightly dollar-negative in that it provides a hit to activity and not to US creditworthiness. But it is going to take a lot to turn the dollar and it could well stay bid into mid-October when US corporates in California need to pay their taxes. DXY looks like it can grind to 107.00/107.20 and perhaps the biggest threat to the dollar is the Bank of Japan selling $20-30bn near 150 in USD/JPY as Japanese officials watch FX 'with a strong sense of urgency'.

EUR/USD near 1.05 would suggest that a lot of confidence has been lost in the euro. Yet the European Central Bank's trade-weighted euro is just 2.5% off its July highs. We can probably all agree that the dominant trend is a strong dollar. However, two developments this week warn that the euro may be due some independent weakness. The first is the suggestion from some ECB officials that Minimum Required Reserves for European banks need to be raised - perhaps substantially. Our banking specialists in research feel that such a move would hit banking liquidity at a crucial juncture and no doubt weigh further on already soft bank lending. We think an MRR hike would be a clear euro negative.

Additionally, another emerging story this week is the Italian BTP- German Bund 10-year spread widening out to 200bp as the Italian government announces looser fiscal policy. This will put the issue of the return of Maastricht fiscal criteria back in the spotlight for early next year and will be a factor worth assessing for whether it puts a renewed risk premium back into the euro.

Based on the above, there seems no reason to fight this bearish EUR/USD trend just yet. But for today, keep a look out for German and Spanish inflation - in case it builds momentum for one last ECB hike. If not, expect EUR/USD to continue drifting to the 1.0400/0410 area.

Elsewhere, the Czech National Bank (CNB) has laid out its strategy for its forthcoming easing cycle - a cycle we expect to start in November.

Like the euro, sterling has probably been caught in the crossfire of position adjustment. Speculators had been trying to hold onto long euro and sterling positions through the spring, despite the strengthening dollar. Presumably, these positions have now been cut. Like EUR/USD, GBP/USD remains vulnerable to the 1.20/21 area.

High US interest rates are proving a headwind to emerging currencies worldwide - even to the mighty Mexican peso. In addition, the peso this month is facing the unwind of Banxico's FX intervention book - a front-loaded exercise that we felt could weigh on the peso this month and perhaps into October, too. With the dollar set to stay strong for the next few weeks, USD/MXN could head up to the 200-day moving average at 17.85 or even briefly trade above 18. However, we like the peso multi-quarter and expect good peso buying interest should USD/MXN trade over 18.

Today also sees Banxico announce its latest monetary policy decision. No one expects a change in the 11.25% policy rate. And with US rates so high, it seems too early for Banxico to start entertaining speculation of an easing cycle. This month, the market has priced out 125bp of Banxico easing over the next two years. However, the market still has 200bp of easing priced in. A little more could be taken out of market pricing for the easing cycle today - but not much.

Amid signs the bond market has bought into the Federal Reserve keeping interest rates higher for longer, a cohort of investors is placing bets on the economy hitting a wall — and a sharp policy reversal in short order.

Treasury yields have settled into tight ranges this month near the highest levels in more than a decade as data show a resilient economy and inflation still well above the Fed's 2% target. But with yields anticipating a peak in the policy rate, the outlook for growth takes on greater importance.

The past week has seen a pickup in demand for options that will turn a profit should interest rates tumble before the middle of next year. That's a more dire scenario than what's seen in the swaps market, where traders are no longer pricing in a rate cut during the first half of 2024.

Bond traders have been placing these sorts of bets since the hiking cycle began and so far they haven't panned out. But this time may be different as the Fed's tightening cycle has had more time to work through the economy.

The Fed is widely expected to leave its policy rate unchanged next week after lifting it in July for the 10th time in an aggressive hiking cycle that began in March last year. It's also seen significantly raising its forecast for growth and indicating another rate increase this year in its so-called dot plot. The rate outlook for 2024 remains up for debate. In June, the median projection showed a full percentage point cut by the end of next year.

The longer rates stay elevated so does the risk of a downturn, and at the margin there are more signs of consumer stress as higher borrowing costs and weaker hiring start to erode household spending. With the Fed seen being close to its policy rate peak, the focus is now on growth softening.

"There is a question mark around whether the economy is transitioning to a soft landing or does the labor market weaken towards a more recessionary outlook," said Roger Hallam, global head of rates at Vanguard Asset Management.

The week saw notable demand for options linked to the Secured Overnight Financing Rate — which closely aligns to the projected path of Fed's policy rate — hedging multiple rate cuts before June. These trades likely accompany existing positions that reflect the Fed's current message, allowing some traders to benefit from a surprise policy pivot.

One trade positioned for a 3% rate by the middle of next year versus a current market level around 5%. The premium paid on that bet was in excess of $10 million. Other similar trades surrounding March were also made over the course of the week.

Ramping up wagers that the Fed could pivot to rate cuts by mid-2024, or even before, stands in sharp contrast to policy makers stressing a higher-for-longer narrative. Meanwhile, the current Fed rate at 5.25%-5.5%, well above the US annual inflation rate and three-month annualized figure, is seen as threatening the growth outlook.

As a result, investors are more worried about recession than they were nine months ago, according to Robert Waldner at Invesco.

"There is an increasing risk of recession as rates stay high and nominal growth comes down," the chief strategist said. "As inflation is coming down, central bank policy is getting tighter, and if they don't consider this, it will increase the risk of an accident."

Positioning through options for next year's Fed meetings in March and June may make sense, given the bond market faces the likelihood of being stuck in a holding pattern as investors wait for clarity on the economy.

It's very reasonable to see lower yields in an economic environment heading into a downturn, according to Vanguard's Hallam. But the picture for bond buyers gets complicated should higher energy prices stall the recent disinflationary trends.

"Sticky inflation would make it very difficult for the Fed to ease next year," he said.

Given the uncertainty over the outlook for the economy and rates, parking funds in cash-like equivalents has been gaining favor. Shorter-dated Treasuries returning 5%-plus have seen a significant slice of investment flows locking in relatively high yields, according to EPFR fund data for this year.

For Monica Defend, head of the Amundi Institute, the middle of the Treasury curve looks attractive for a multi-strategy portfolio.

With rates staying higher for longer, yields should turn lower as the economy weakens, and the five- to 10-year sectors "are a good alternative to equities," she said.

Dollar's strength remains unabated, particularly against its European counterparts and Yen. The greenback rose alongside 10-year yield, which soared past the 4.6% mark overnight, a level unseen in over 15 years. The surging global treasury yields are a clear indicator of the market's expectation for a prolonged period of restrictive monetary policies by central banks across the globe. This comes as the market grapples with the looming shadow of a potential U.S. government shutdown, adding another layer of complexity to the fiscal equation.

However, this bullish momentum for Dollar is somewhat stymied against commodity currencies. Canadian Dollar emerging as the second strongest for the week so far, spurred by soaring oil prices. New Zealand Dollar is not far behind, buoyed by speculation of another interest rate hike by RBNZ in the fourth quarter. Conversely, the Australian Dollar trails the pack among its commodity-based peers.

Swiss Franc continues its underperformance against Euro and Sterling. Yen paints a mixed picture, as Japanese authorities seem to be adeptly employing verbal interventions, effectively slowing the currency's decline by putting potential Yen sellers on alert.

Technically, Gold's accelerated decline confirms resumption of whole down trend from 2062.95. Near term outlook will now stay bearish as long as 1900.81 support turned resistance holds. Next target is 61.8% projection of 2062.95 to 1892.76 from 1947.21 at 1842.03. This decline from 2062.95 is viewed as a medium term move inside the long term pattern from 2074.84 (2020 high). Break of 1842.03 will target 100% projection at 1777.02 and below.

In Asia, Nikkei closed down -1.55%. Hong Kong HSI is down -1.20%. China Shanghai SSE is up 0.17%. Singapore Strait Times is up 0.13%. Japan 10-year JGB yield is up 0.0124 at 0.752. Overnight, DOW dropped -0.20%. S&P 500 rose 0.02%. NASDAQ rose 0.22%. 10-year yield rose 0.068 to 4.626.

September has seen a noteworthy rebound in New Zealand's ANZ Business Confidence, rising from -3.7 to 1.5. However, a closer examination of the details offers a more nuanced picture.

Metrics such as own activity output experienced a slight decline, dropping from 11.2 to 10.9. More alarmingly, export intentions plummeted from a positive 7.5 to a -0.4. There were also declines in investment intentions (from -1.3 to -4.1) and employment intentions (from 4.6 to 1.2).

On the inflation front, cost expectations edged upwards from 75.3 to 78.6, while profit expectations showed an improvement, moving from -17.6 to -13.2. Pricing intentions rose from 44.0 to 47.1, but inflation expectations took a downward turn, shifting from 5.06 to 4.95.

ANZ provided their insights on this mixed bag of indicators, stating, "The New Zealand economy is certainly patchy, and the rebound in activity indicators – that's been evident since the start of the year – may be running out of steam."

They further highlighted the complexities in the inflation scenario: "Inflation pressures are gradually waning in the big picture, but not rapidly nor in a straight line, and the jury remains out on whether it's occurring fast enough to bring core inflation pressures down in a timely fashion."

Looking ahead, ANZ anticipates further action from RBNZ to ensure inflation is reined in effectively, with a 25 bps hike expected in November.

Australian retail sales see modest 0.2% mom rise amid cost-of-living pressures

The latest retail statistics out of Australia show a muted picture of consumer spending, with retail sales turnover in August rising only 0.2% mom (in seasonally adjusted terms) to AUD 35.4B, falling short of the anticipated 0.3% increase. Through the year, sales turnover was up 1.5% yoy.

According to Ben Dorber, the head of retail statistics at the Australian Bureau of Statistics (ABS), this modest rise indicates a notable restraint in consumer spending. Dorber noted, "The modest rise in August shows consumers continued to restrain their retail spending."

The trend growth in retail sales paints an even starker image. "In trend terms, retail turnover rose 0.1 per cent, and was up only 1.3 per cent compared to August 2022 – the smallest trend growth over 12 months in the history of the series," Dorber added.

Dorber highlighted, "Considering how high inflation and strong population growth have added to retail turnover in the past year, the historically low trend growth highlights just how much consumers have pulled back in response to cost-of-living pressures."

Oil prices saw a sharp ascent overnight, extending their gains into Asian trading session today and marking their highest point in over a year. With technical indicators pointing to a potential acceleration, WTI oil is on the march towards 100 psychological level.

A factor propelling this surge is the pronounced drop in US crude stocks, amplifying concerns about tightening global supply in light of OPEC+ production cuts, spearheaded by Saudi Arabia. Yesterday's data revealed that oil inventories dipped by -2.2m barrels last week, settling at 416.3m barrels.

Furthermore, the stockpiles at Cushing, Oklahoma, a crucial storage hub and the delivery point for US crude futures, saw a reduction of -943k barrels over the week, dropping to just under 22m barrels, lowest since July 2022. Significantly, these reserves at Cushing have been on decline for seven consecutive weeks. Many market participants view these current levels as bordering on the minimum required for operational functionality of the storage tanks.

Technically, WTI crude oil's recent up trend resumed after brief consolidations and surged through 95 handle. There is sign of upside acceleration with break of the rising channel resistance. Near term outlook will stay bullish as long as 88.67 support holds. Next target is 50% retracement of 131.82 to 63.67 at 97.74. Decisive break there could pave the way through 100 psychological to 61.8% retracement at 105.78.

ECB monthly bulletin and Eurozone economic sentiment indicator will be released in European session. Germany will publish CPI flash. Later in the day, US jobless claims and pending home sales will be featured along with Q2 GDP final.

USD/CHF's rally continues and hit as high as 0.9224. Intraday bias stays on the upside for 0.9439 resistance next. On the downside, below 0.9152 minor support will turn intraday bias neutral and bring consolidations, before staging another rally.

In the bigger picture, current development indicates that rise from 0.8551 is reversing whole down trend from 1.0146. Further rally would then be seen to 61.8% retracement at 0.9537 and above. For now, this will be the favored case as long as 55 D EMA (now at 0.8917) holds, even in case of deep pullback.

In the euro area, we receive inflation data from Spain and Germany which will give some clues ahead of the aggregate euro area inflation print tomorrow.In the US, Powell hosts a town hall speech at 22:00 CET with Q&As. There are several ECB speeches today including Holzman as well as a couple of speeches by the Riksbank members.

The oil price keeps rising as an unexpected decline in China's inventory added to the speculation of a "deficit" in the supply versus demand as US stockpiles are also running low. Rising energy prices will add to the inflationary pressure and supports the view that central banks will be "higher for longer".

Federal Reserves Kashkari stated in various interviews yesterday that he believes that more than one hike could be necessary should the past tightening not have the desired effect. On the other hand, a potential US government shut-down could have the opposite effect.

The main event in the European markets today is the Spanish and German inflation data where inflation is expected to have risen to 0.6% m/m in September relative to 0.5% m/m in August (and 3.3% y/y vs. 2.6% y/y). German inflation is expected to rise 0.3% m/m relative to 0.4% in August (4.5% y/y vs. 6.4% y/y).

Equities: Global equities were marginally higher yesterday but with huge regional and sector differences. There were two big drivers yesterday, higher yields primarily in the long end of the curve and higher oil prices. Energy sector as the best performer is no surprise under those circumstances. However, the sector shifts out defensives into industrials and other cyclicals was more surprising as investors currently see higher yields as a challenge for the economic backdrop. In the US: Dow -0.2%, S&P 500 +0.02%, Nasdaq +0.2% and Russell 2000 +1.0%. Markets in Asia are quite negative today as the oil price continues to march towards 100 dollar per barrel. US and European futures are mixed this morning.

FI: Yields rose significantly yesterday after an initial decline and thus follow the rise we have been seeing after the central banks meetings during the past weeks. There was a very modest bullish flattening as well as a modest tightening of the 10Y Italian-German yield spread after a significant widening for most of September, where the spread moved from 160-165bp to 190-195bp.

FX: New year-highs for both broad USD and oil prices. EUR/NOK broke below the 200D-MA on the back of the oil price rally. EUR/GBP went below 0.87 once again on a generally weak day for the EUR. The SEK continues to perform, although with signs that downside momentum might start to abate soon.

Credit: Credit indices continued to drift wider yesterday where iTraxx Xover widened 7bp further and Main 1bp. While primary market activity picked up, investors seem more price sensitive as reflected in a lower travel from IPT to final pricing.

In Norway, retail sales is expected to have stabilised from April through to June but dropped 0.8% in July. Low real wage growth, higher mortgage rates and a shift towards consumption of services are presenting huge headwinds for retailers, so we expect a further decrease of around 0.5% in August.

The selloff in bonds continues on U.S. government drama. The sell-off in U.S. 10-year papers accelerated yesterday and the 10-year yield spiked to 2.64%. The 2-year yield however, which captures the expectations on Federal Reserve (Fed) actions remain steady a touch above the 5% mark, as even though the Fed's once-dove-now-hawk Neel Kashkari said that the U.S. may need more than one more rate hike to tame inflation, the looming government shutdown talks, the Detroit strikes and a few weak economic data released lately regarding the U.S. melting savings and fading confidence hint that it may be ambitious to bet on more rate hikes before the dust settles. But you never know, the U.S. will reveal its latest GDP update and it is expected to be revised higher. If that's the case, we will likely see more choppiness in bond markets.

Volatility in U.S. bond markets is rising, though we are far from alarming levels, while the U.S. dollar continues to amass major safe haven demands. Nothing stands before the U.S. dollar's safe haven dominance. Gold slipped below the $1900 per ounce; rising yields increase the opportunity cost of holding the non-interest bearing gold, and thus, should keep a sustainable pressure on the precious metal even after the U.S. government shutdown show ends, as the Fed remains sufficiently decided to keep rates higher for longer, and the U.S. Treasury will be issuing more bonds, paying better yields in the next few months.

Energy and technology stocks helped the S&P500 limit losses yesterday. The energy sector was up on a fresh jump in oil prices after U.S. inventories at Cushing and Oklahoma fell to critical levels, hinting at growing supply deficit in global energy space. AI stocks were up as U.S. President Joe Biden said that he will sign an executive action on AI this fall, and Meta announced to introduce AI features in Instagram, Messenger, and WhatsApp. Earlier this week, Amazon announced to buy a $4 billion stake in Anthropic, similar to Microsoft's creator of ChatGPT (which by the way is now valued at around $90bn, whereas it was worth $30bn at the beginning of this year). Amazon is also making a move into the AI's magical world, aiming to give its AWS customers access to AI. Microsoft told investors in the latest earnings call that the AI would increase Azure's revenue by around 2%, Anthropic should help drive similar revenue for AWS. Now, unfortunately for Amazon, investors didn't react with the same excitement than they did with Microsoft's investment in ChatGPT. Maybe a new DoJ probe was responsible for it, or it was just the rising yields. But somehow, Amazon follows its MAMAA peers with a certain lag, the e-commerce wing of the business is certainly responsible for that, in an environment full of worries regarding an imminent slowdown in spending.

Zooming out, the S&P500 remains under pressure. Despite insatiable appetite for AI, the rising yields threaten valuations. There is an important support zone near 4180/4200 region, which shelters the 200-DMA and the major 38.2% Fibonacci retracement on last year's rally. If that support is pulled out, the index will step into a mid-term bearish consolidation zone, and selloff could deepen into yearend. In the short run, the risks remain tilted to the downside, as JP Morgan's Hedged Equity Fund apparently holds tens of thousands of protective puts aimed to protect the long-stock product from selloff and volatility. Those put options will expire on Friday, and their strike price are said to be not far from the actual levels. If exercised, we could see an additional negative pressure on Wall Street stocks.

European markets lost ground for the third day in a row yesterday, with the DAX languishing close to 6-month lows, while the FTSE100 struggled slipping back to its lowest level in almost 2-weeks.

U.S. markets fared little better with the S&P500 and Nasdaq 100 slipping to 3-month lows before rebounding to close slightly higher on the day, while Asia markets have also continued to struggle on concerns over China's property sector.

The wider concern however is how quickly inflationary pressures can recede at a time when oil prices continue to push higher, with Brent prices moving ever closer to $100 a barrel and what effect this 30% move off the summer lows will have on the global economy, consumer consumption patterns and more importantly company profit margins.

Today's European open looks set to see a modest rebound largely due to position adjustment as we head towards the end of the week, month, and quarter tomorrow.

The main focus today is on the latest German and Spain inflation numbers for September which could see a sharp slowdown in the annual rate.

Earlier this month the ECB took the surprise decision to go ahead with another 25bps rate rise in the face of overwhelming evidence that the economy across Europe is slowing sharply, even as inflation has been shown to slowing sharply in recent months.

Despite concerns that the ECB has once again set itself up for another policy mistake the hawks on the governing council carried the day, even as the ECB President Christine Lagarde made the case that it would probably be the last in the current cycle.

Only time will tell how much of a policy mistake this turns out to be, but today's German flash CPI for September could well reinforce this feeling that perhaps the ECB could have exercised a little more patience.

Expectations are for headline CPI in Germany to slow from 6.4% to 4.5%, which in turn is likely to translate into a similarly sharp slowdown in tomorrow's EU flash CPI numbers, at a time when both manufacturing and services PMIs are both deep in contraction territory.

We also have the final numbers for U.S. Q2 GDP, as well as the latest weekly jobless claims numbers, which are expected to increase to 215k from 201k.

After seeing a slowdown to 2% at the start of the year, the U.S. economy looked set to see a strong improvement in Q2 after the initial iteration of Q2 GDP came in at 2.4%, despite a slowdown in personal consumption to 1.6%. The second revision to Q2 GDP threw a bit of a curveball to that after a surprise downgrade to 2.1% when expectations had been for an upgrade to 2.5%.

Today's final adjustment is expected to see this upgraded to 2.2%, with the downward revision coming about due to a fall in inventory levels, which declined by $1.8bn, instead of seeing an increase, while business spending was also reduced on equipment and IP products.

Core prices also slowed for the quarter, coming down to 3.7% in a welcome move that helped make the argument for a pause in the rate hiking cycle when the Federal Reserve met earlier this month.

EUR/USD – found support just above the lows of this year at the 1.0480 area. A move below 1.0480 retargets parity. The main resistance remains back at the 1.0740 area, which we need to get above to stabilise and minimise the risk of further weakness.

GBP/USD – bias remains for a retest of the 1.2000 area, with resistance at the 1.2300 area in the short term. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.

EUR/GBP – failed to overcome the 0.8700 area yesterday and resistance at the 200-day SMA at 0.8720, which is capping the upside. A break of 0.8720 targets the 0.8800 area, however while below the bias remains for a pullback. Support now at the 0.8620 area.

USD/JPY – still on course for the 150.00 area with support currently at the lows last week at 147.20/30. A break above 150.00 retargets last year's higher at 152.00. Major support currently at the 146.00 area.