Gold Prices are Trying to Recover from Their Strong Losses for these Reasons!

The US dollar pulled back on Wednesday and continued trading on the back foot today, after the ADP National Employment Report revealed that US private payrolls increased by far less than expected in September, suggesting that the labor market is indeed feeling the heat of higher interest rates.

Traders rushed to lower their implied Fed rate path and they are now assigning only a 40% probability for another rate hike by December, while they expect interest rates to end 2024 at 4.6%, notably below the Fed's projection of 5.1%.

Having said that though, other data continued to point to a US economy that continues to perform well. The ISM non-manufacturing PMI declined as new orders fell to a nine-month low, but the pace remained consistent with expectations of solid growth in Q3. On top of that, the survey showed that services inflation remained elevated, while employment slowed only gradually, suggesting that it is too early for Fed officials to abandon the ‘higher for longer' mentality.

Following the weak ADP print, investors will now be eager to see whether nonfarm payrolls will also miss their forecast on Friday, although history has shown that the former is far from a reliable predictor of the latter. Nonfarm payrolls are expected to have slowed to 163k in September from 187k, but the unemployment rate is expected to have ticked down and wage growth to have remained elevated. Such a report could revive trust in the Fed's ‘higher for longer' view and perhaps allow Treasury yields and the US dollar to rebound and extend their uptrends.

The Japanese yen ended Wednesday on the back foot, despite Tuesday's sharp rally that stoked speculation of intervention. That said, the Japanese currency recovered again today during Asian trading, with ‘Gotobi Day' being cited as a reason this time. ‘Gotobi' refers to the practice of payments in Japan being made every fifth day. Given that these are the days many Japanese companies are typically settling accounts and payments, they can lead to increased activity in the banking and financial sectors.

Attention for dollar/yen traders will now start shifting towards tomorrow's US jobs data, where a decent report could result in some recovery. The big question though is whether this recovery will take the pair back above 150, and whether such a breach will trigger a second round of intervention.

Nonetheless, even in the case of intervention, the bigger picture is unlikely to be altered much. As long as the BoJ keeps Japanese government bond (JGB) yields capped and the Fed remains willing to keep interest rates higher for longer, dollar/yen may be destined for a rebound.

Wall Street took a breather following the weaker-than-expected ADP report and the lowering of the market's implied rate path, with the more rate-sensitive Nasdaq gaining the most. That said, with the earnings season kicking off and Friday's nonfarm payrolls still pending, it seems unwise to assume that Wall Street hit a bottom.

Elsewhere, oil prices tumbled yesterday as the Energy Information Administration (EIA) reported that finished motor gasoline supplies, a proxy for demand, fell to the lowest level since the beginning of the year last week.

Although OPEC+ members maintained output cuts to keep supply tight, it seems that demand concerns are starting to be reflected in prices, and with China and Eurozone, the world's two largest oil consumers behind the US, facing economic challenges, those concerns may continue to grow.

Asian shares staged a rebound on Thursday following the broadly positive cues from Wall Street overnight as plunging oil prices and weak U.S. jobs data lifted market sentiment. European futures are pointing to a positive open amid the improving mood with investors directing their attention toward Friday's U.S. payrolls report which could support or hinder the market rally.

Looking at currencies, the yen is up roughly 0.3% this morning following the aggressive spike in value on Tuesday after touching 150 in USD/JPY. Given how it was the sole gainer versus the dollar, this fuelled speculation around official Japanese intervention. However, markets are still guessing what exactly triggered the move.

In the commodity space, oil prices plunged over 5% on Wednesday thanks to demand-side fears and a huge build in gasoline inventories. Gold is lingering near its lowest level since March, drawing some support from a weaker dollar and falling Treasury yields. Nevertheless, the precious metal remains vulnerable to further losses with sustained weakness below $1830 opening a path towards $1810.

The combination of economic data and speeches from Fed officials today could trigger more dollar volatility ahead of the highly anticipated non-farm payrolls report on Friday. Financial markets remain highly sensitive to U.S. Treasury yields, and this continues to be reflected through the dollar rally.

The U.S. economy is forecast to have created 170,000 jobs in September following August's increase of 187,000 while the unemployment rate is seen cooling to 3.7% from 3.8% in the previous month.

A strong-than-expected U.S. jobs report may support the "higher for longer" expectations around U.S. interest rates, boosting the dollar as a result. However, further evidence of a cooling labour market may support the argument that the Fed is finished with hiking rates this year, weakening the greenback. As of writing, traders are currently pricing in a 20% probability of a 25-basis point hike in November, with this jumping to around 40% by December, according to Fed Funds futures.

30-year U.S. Treasury yields briefly breached 5%, which was enough to trigger a wave of buying across the curve. Later on, this was also supported by weaker ADP payrolls estimate, which should have little actual bearing on expectations for tomorrow's official jobs numbers. The 30-year eventually rallied by 15bp back to 4.84%. The 10-year, which had come close to 4.88% rallied towards 4.7%. Versus yesterday's levels these moves implied a morphing of the bear steepening into a bull steepening.

In Europe, the 10-year Bund yield briefly topped 3% at the start of yesterday's session but then saw a rally back towards 2.9%. That move largely reflected what was going on in Treasuries.

The broader narrative has so far not changed, though we did also see disappointing retail sales figures for the eurozone yesterday and also oil sliding through the day. The U.S. ISM services and eurozone PMIs were slightly better than anticipated on the other hand. But it appears more that pain tolerances surrounding the prospects of ever higher (real) rates and thus tighter financial conditions were being tested out over the past few sessions. With rates now coming off their highs, riskier assets and - in Europe - sovereign spreads have seen some bounce back.

To that end, remarks from the European Central Bank's Mario Centeno yesterday were interesting as he noted that “real interest rates will continue increasing because inflation is falling” but added also that this means the ECB will have to proceed with some caution going forward. Looking further ahead, that might actually be a contributing factor that allows central banks to eventually ease rates. Currently, markets are fully discounting a first 25bp cut from the ECB by July next year and see a first cut by the Federal Reserve in June. However, more important for now remains how far this easing will take us. And that discounted trough in policy rates has barely slipped below 2.9% if we look down a strip of ESTR OIS forwards, and in the U.S., the Fed funds rate is still seen bottoming out around 4.1%.

We note that yesterday's retreat saw the Bund curve bull flattening, whereas the Treasury curve turned to a bull steepening. Also looking further into the future, faced with likely stickier inflation and also considering absolute levels, the ECB looks to have less room to cut rates, which should limit the steepening potential relative to the U.S..

Today's main data point in the U.S. will be the initial jobless claims. Recent releases have seen relatively strong market reactions, and as opposed to the JOLTs data earlier this week which had contributed to pushing rates higher, the claims offer a more contemporaneous reading of the job market. Ahead of the claims data, we will also get the Challenger job cuts numbers.

In the UK, the focus is on the Bank of England's Decision Maker Panel survey, which has been pointing to less aggressive price and wage rises among firms over recent months. We won't have much market-relevant data out of the eurozone, but a number of public appearances by ECB officials – including again Philip Lane and Luis de Guindos, as well as the Bundesbank's Joachim Nagel and François Villeroy – might give us some comments on policy.

Government bond primary markets will see heavier supply as France auctions a new 10Y benchmark alongside taps of 20Y and 30Y bonds, in total for up to €10.5bn. Spain sells a new 5Y benchmark alongside taps of its 10Y and 20Y green bonds. In Italy, the sale of the BTP Valore retail bond enters its fourth day. Take-up so far of €12.9bn suggests that the final size could top €15bn.

On the surface, it is difficult to pin yesterday's sell-off on the EIA's weekly inventory report. U.S. commercial crude oil inventories fell by 2.22MMbbls over the week, whilst crude stocks at Cushing, the WTI delivery hub, increased by a modest 132Mbbls. So, nothing glaringly bearish in these numbers.

However, what was more bearish in the release were the gasoline numbers. U.S. gasoline inventories increased by almost 6.5MMbbls over the week- the largest increase since January 2022. This move has helped to take total U.S. gasoline inventories back above the five-year average for this time of year. This large build occurred even though refiners reduced operating rates by 2.2pp over the week to 87.3%. Therefore, it was weaker demand which was behind the large gasoline stock build. Seasonally, it is normal to see gasoline demand falling during this time of year with the driving season well and truly behind us. However, even factoring in this seasonality, implied demand was very weak over the last week. Implied gasoline demand fell by 605Mbbls/d WoW to 8.01MMbbls/d. This is the weakest demand for this time of year since the early 2000s. The four-week rolling average demand number has also been trending below the five-year average since July and this latest data point has dragged it to the lowest levels since 2000. This is likely raising concerns over demand, particularly in this higher price environment.

This weakness has weighed heavily on the gasoline market and this is nothing new with the prompt RBOB gasoline crack falling from more than US$40/bbl in mid-August to less than $8/bbl currently. The weakness in gasoline has fed through to weaker refinery margins, which appears to have ultimately fed through to crude oil.

The more recent price action in oil also suggests that the rally we saw over much of the third quarter has exhausted itself. The current rates environment along with the USD strength has only provided stronger headwinds to the market. U.S. 10-year Treasury yields have hit their highest levels since 2007 this week, whilst the USD index is at its strongest levels since November 2022. Until we start to see a shift in the 'higher for longer' narrative when it comes to rates, the oil market will likely struggle to push significantly higher.

Clearly, the exhaustion of the recent rally will also give Saudi Arabia and Russia confidence in their decision to continue with their additional voluntary supply cuts through until year end. We still forecast a large deficit for the remainder of this year, which suggests that prices will remain relatively well supported. We continue to expect ICE Brent to average US$92/bbl over 4Q23.

US bonds took a breather yesterday, with 10-year yields retracting below 4.75% after having reached a peak of 4.88% during the session. Private ADP payrolls contributed to halting the bond selloff, with hiring slowing from 180k to 89k in September (150k consensus). We are still quite surprised to see markets react to ADP figures: they have close to zero predictability power for the actual payrolls, and our economist actually points to an illogical inverse correlation (weak ADP=strong official payrolls).

The ISM services showed a modest slowdown across all survey measures, which however stayed well into expansionary territory (50+). Interestingly, there is an ongoing contrast with the S&P PMI, which supposedly asks the same questions to the same pool of companies but indicates flat activity (50.1) as opposed to the ISM's upbeat 53.2.

In FX, any tentative dollar correction is not finding too many followers. The swing in rate advantage after the recent bond sell-off makes the dollar a very hard sell, and cautious trading ahead of US payrolls tomorrow shouldn't help.

Market pricing remains well below the FOMC dot plot expectations: -15bp for end-2023, -50bp for end-2023. The 2-year USD swap rate faced a 10bp correction yesterday to fall back below 5.0%, but it all seems too reliant on the jobs figures coming in on the soft side (but as discussed, ADP isn't a good predictor). Ultimately, there is still room for a hawkish repricing at the front end of the USD curve, and the dollar's upside risks remain substantial.

DXY may stabilise around 107.00 today, as markets will assess whether jobless claims can continue to surprise on the downside (bearish for bonds, positive for the dollar), while a number of Federal Reserve speakers are scheduled to deliver remarks. Most speakers are hawks, so expect more support for another hike.

In terms of US politics, it appears that the ouster of House Speaker Kevin McCarthy has had a rather negligible impact on FX but risk assets like equities may take a hit if potential successors are unable to garner enough support and the process proves to be a rather protracted one. Expect defensive currencies like the yen or the Swiss franc to find support should US political stress become a factor, as the dollar might see its safe-haven role being thwarted by risks to growth and consequent dovish repricing of Fed expectations.

EUR/USD has rebounded from the 1.0450 lows but may lack enough buyers above the 1.0530/1.0550 area. The dollar remains an expensive sell, and there simply isn't a compelling story in the eurozone to counter the US exceptionalism narrative. A big drop in August's eurozone retail sales was another case in point yesterday.

The ability of EUR/USD to stay attached to 1.0500 is almost entirely linked to the US bond market enjoying two consecutive days of reprieve. That may be possible due to the lack of key US data today outside of jobless claims, but the pair is facing the tangible possibility of another leg lower with US payrolls tomorrow.

Domestically, the eurozone calendar is quiet today, but we'll hear from many ECB speakers, including Joachim Nagel, Luis de Guindos, François Villeroy, and Philip Lane – who will participate in a panel with the Bank of England's Ben Broadbent and Riksbank's Anna Breman.

The Riksbank hit the headlines yesterday and prompted a short-lived SEK rally as it asked the Swedish Debt Office to consider phasing out the debt currency exposure at a slower pace so as not to hinder the krona's re-appreciation. Sweden's foreign currency debt as a percentage of total debt has declined from 21% to just below 9% in the past year. FX swaps (via which most of the foreign currency exposure would be) have been cut dramatically, from SEK 24bn in November 2021 to SEK 1.3bn as of March 2023.

The Debt Office is planning to bring its debt FX exposure to zero by end-2026: quite a long period for a relatively small residual amount, meaning the impact on the krona should be negligible. Even the Riksbank seemed to acknowledge the limited direct implications on the exchange rate, but lamented how the debt office is selling SEK while the Riksbank is buying SEK. In our view, that denotes how much focus the Riksbank has been putting on SEK recently, and may have been an implicit admission of the dual purpose of their FX hedging operations (risk management + SEK appreciation). The first set of data on the RB's hedging operations is due at the end of this week or next, and will tell us whether – as we are inclined to think – the Riksbank is buying more SEK at higher USD/SEK/EUR/SEK. The Riksbank seems to have lost some grip on the market with FX operations, and both pairs may grind higher in the unstable risk environment.

EUR/CHF continues to edge lower after September's spike to 0.97, when the Swiss National Bank (SNB) left rates unchanged at 1.75%. Helping it lower, we assume, is the ongoing SNB intervention campaign as it tries to drive the nominal trade weight Swiss franc higher to offset Switzerland's inflation differential with its trading partners. In other words, it wants to keep the real Swiss franc stable. The SNB sold CHF30bn of FX in 2Q23 to do this and strongly hinted in September that it would sell more. The sense that the SNB has 'got the Swiss franc's back' has helped make it the strongest G10 currency this year. With the dollar looking like it wants to stay strong over coming months, the SNB will have to get a stronger Swiss franc via a lower EUR/CHF. That is why we can see it trading back to 0.95 over coming months. Also helping EUR/CHF lower should be European political developments and the risk that a re-introduction of the Stability and Growth Pact collides with some loose fiscal policies in southern Europe.

Today, we continue the story of central banks in the region. The National Bank of Poland cut rates by 25bp as expected. However, the headlines around the release of the decision have attracted a lot of attention and the market will focus even more on Governor Adam Glapiński's press conference at 15:00 local time today. The post-decision statement implies that further rate cuts will follow, which is our forecast, and we are likely to hear a dovish tone again today albeit a bit more cautious compared to the September meeting, in our view.

In the markets, the FRA and IRS curve jumped roughly 30bp higher after the decision at the short end, pushing the interest rate differential to the highest level since the September decision, implying a stronger zloty. The zloty stabilised at 4.60 EUR/PLN at the end of the day yesterday and for now, we see no room for further appreciation. So the press conference will be crucial to see what happens next. But the dovish tone should again be rather negative for the zloty, which may struggle to sustain yesterday's strength today.

In Romania, the central bank meets today, but here it seems to be a non-event. Rates are expected to remain unchanged at 7.0% and we expect the National Bank of Romania to stay on the safe side for a bit longer, with the first rate cut here likely to be the last in the CEE4 region. We now expect the first rate cut in 2Q24 (1Q previously). We also expect the central bank to be more active in the FX market in an attempt to suck record excess liquidity out of the system, which also means a stable EUR/RON at current levels.

A string of central bank speakers on today's calendar. The interpretation of recent tightening of financial conditions will be closely watched.

The weekly jobless claims data in the U.S. have been among those indicators pointing to a still-strong labour market, so this data will be interesting to follow today.

From Japan, we get August cash earnings at 1:30 CET Friday. It has disappointed over the summer, and a pick-up here is key for the BoJ to start normalising its policies.

U.S. Macro: U.S. data came in weaker than expected yesterday, providing some support to market sentiment. ADP private employment rose by only 89,000 new jobs in September, which was well below expectations of 150,000. The ADP figures have often deviated quite substantially from the official payrolls data, but markets took notice of the weakness as a sign of some renewed softening in the U.S. labour market. The headline ISM Services index fell in line with expectations from 54.5 to 53.6 in September, but what stood out was a significant decline in the forward-looking new orders component from 57.5 to 51.8. In our view, this points towards some weakening of consumer demand ahead.

Oil: The oil price rally has clearly lost steam, and yesterday the Brent price plunged 6% to 86.4 USD/barrel yesterday, despite Russia and Saudi Arabia confirming their commitment to maintain the OPEC+ production curbs of 1 million barrels/day until the end of the year. Tighter financial conditions might be beginning to bite in the commodity markets, and furthermore, the weekly EIA report out yesterday showed further weakness in U.S. gasoline demand, now being at the lowest level for the season in 25 years.

Equities: Equities finished a notch higher yesterday. The trigger for the turnaround was not hard to find: A pullback in yields. S&P 500 immediately rebounded 0.8% while Stoxx 600 only recovered to -0.1%. Large caps outperformed small caps, growth beat value and cyclicals rebounded. Huge sector rotation dispersion again, with best performing sector consumer discretionary up 2% and underperforming energy down -3%, as oil prices plunged. The yields fear is easing in Asia as well this morning, with BB APAC up 2%. U.S. futures are unchanged.

FI: The bond market sell-off stalled yesterday as weaker U.S. macro data supported the sentiment. 10Y Bund yields declined by 5bp to 2.91% throughout the day, while the 10Y UST yield ended the day 7bp lower at 4.73%. The 5y5y EUR inflation swap rate was close to unchanged implying that a decline in real yields was behind yesterday's move.

FX: Yesterday's session saw the latest USD rally take a breather amid rates rallying and equities rebounding. This contributed to lifting EUR/USD above 1.05. Notably, despite the slight relief in risk-sensitive assets neither NOK nor SEK saw any strength with both EUR/NOK and EUR/SEK continuing to move higher. USD/JPY still trades around the 149 level after Tuesday's knee-jerk reaction lower while EUR/GBP trades around the 0.865-mark.

Credit: Credit markets were in a wait-and-see mode yesterday as markets digested important macroeconomic numbers out of the U.S.. The primary credit market was also muted with low new issuing activity. Main was 1bp wider while X-over was 4bp wider.