Stocks down, yields up after robust US data

Headlines

* US services gauge rises to six-month high, topping all forecasts

* Hawkish hold from the Bank of Canada who warn of elevated inflation

* BoE’s Governor Bailey signals rate hikes may be near the end

* USD hits six-month peak after US data, weak yen draws warning

FX: USD made six-month highs at 105.02 before closing lower below 105. The ISM services data also rose to a six-month top of 54.5 in August from 52.7 in July. Forecasts had anticipated a slight decline. The 10-year yield enjoyed a fourth day of gains to 4.29%.  Strong resistance sits around the August high and October 2022 top at 4.33/36%.  The 2-year yield moved above 5% and closed near the highs. The chances of a November Fed hike are back above 40% close to a coin toss.

EUR fell to a three-month low at 1.0702 after the US data. It had a narrow range day consolidating its recent breakdown from Tuesday. The June bottom sits in the 1.0660 area. The ECB’s Knot had earlier pushed back on the idea that the ECB will stay on the sidelines.

GBP fell to 10-week lows at 1.2482 but closed just above 1.25. BoE Governor Bailey casts doubt on the need for further interest rate hikes.

USD/JPY made a fresh cycle high at 147.81 before closing just below. This came after more jawboning by Japanese authorities saying they will not rule out options if speculative moves persist. This was the strongest warning of intervention since mid-August.  

AUD again fell to 0.6357 before buyers stepped in. The major printed a doji candle signalling some indecision. USD/CAD advanced to 1.3676 so above the April top at 1.3667, a five-month low for the CAD, on the BoC rate decision. Rates were kept unchanged amid a balanced statement. The door was kept ajar for further hikes. But the lagged effects of tightening may weigh increasingly on the economy which is already showing some cracks.

Stocks: US equities closed lower after the US services sector data pointed to inflation pressures remaining. Tech and consumer discretionary sectors were the worst performers. The benchmark S&P 500 settled 0.70% lower at 4465. The tech-heavy Nasdaq finished down 0.88%. The Dow fell 0.57% finishing at 34443. Apple fell 3.6% after reports by the WSJ that iPhones and other foreign-branded devices have been banned in China for use by government officials at work. Prices in the tech megacap are now back near the December 2021 highs.

Asian futures are mixed after the weak handover from Wall Street.

European equity futures are pointing to a lower open. The index is trading just above the 200-day SMA. The Euro Stoxx 50 cash closed down 0.72% yesterday.

Gold finished lower for a third day. It now sits on the 200-day SMA at $1916. Brent crude closed higher at $90.42 but didn’t make a new top. There was bearish divergence with the daily RSI which did make a fresh high.

Data Breakdown – US ISM data still solid

The US services sector ISM surprised to the upside in August going against leading indicators. While not at very high levels, it is consistent with US growth accelerating in the third quarter. There are doubts as to how sustainable this will be. But the rise in the inflation prices paid component will keep the hawkish Fed members wary. That said a vote for a pause on rate hikes in two weeks is highly likely.

Recent data over the past few weeks has showed a slowdown in some parts of the US economy and resilience in others. This has buoyed investor hopes of a “Goldilocks” scenario in which the Fed might succeed in taming inflation without triggering a recession. But that could mean that interest rates stay higher for longer keeping the dollar bid, though growth could still slow.

Chart of the Day – GBP/USD breaks down

Sterling was the G10 underperformer yesterday breaking down through recent short-term support. Cable got help from BoE members Governor Bailey and Cunliffe who both sounded somewhat dovish even without Dhingra who continued to defend her dissension against recent rate hikes. The former said many indicators signal a fall in inflation which will be quite marked. Bailey said the MPC is no longer in a phase where it is clear that rates need to rise, and rates were much nearer to their peak. He reiterated that the bank is now data-driven as policy is restrictive.

The market still expects two more rate increases. These are seen peaking at 5.75% before falling gradually next year. Next support in cable is the halfway point of the March rally at 1.2472. The 200-day SMA is below here at 1.2427. Wage data next week will be a big risk event for the pound.