Good news is bad news; strong ISM Services PMI propels US bond yields. Crude oil on a tear, advancing in 9 of 10 days, up 30% from late June lows. GBP lags as BoE Governor Bailey signals tightening cycle end is approaching

By Stuart Talman, XE currency strategist

Last week US equities and risk sensitive assets advanced on the bad news is good news dynamic, softer-than-expected tier 2 US labour market data underscoring the view the Fed will not be required to further hike the target rate (from its current 5.25% - 5.50% level).

US treasury yields (for much of the week), continued to pullback from recent swing highs, slowing the dollar's relentless 7-week surge.

During Friday's session the worm turned, the yield on the benchmark 10-year bond catapulted by 14bps, propelling the dollar higher into the weekly close to extend its week-on-week winning streak to the longest in over a decade.

This week has been punctuated by higher yields and broad-based US dollar strength as yet another key reading on the US economy continued the broader trend of hot macroeconomic data.

The ISM Services PMI provides a comprehensive view of the US economy from a non-manufacturing viewpoint, reporting on numerous sub-components including new orders, employment, inventories, prices, export orders and supplier deliveries. The headline business activity number is referenced against a 50.0 threshold - above represents sector expansion, below contraction.

The ISM Services PMI for August printed at 54.5, up from 52.7 the month prior and beating the consensus estimate of 52.5.

Good news is bad news.

US equity markets have retreated, the S&P500 falling around 1% whilst the interest rate sensitive Nasdaq logged a larger loss as US treasury yields marched higher. The yield on the US 2-year bond which is more sensitive to Fed policy, climbed back through 5%.

In turn, the dollar retains its strength against its major peers, although following Tuesday's strong gains, net moves through Wednesday have been muted. On the G10 leaderboard, GBP is the laggard, down just shy of half-a-percent whilst the Kiwi remains under pressure, shedding around a quarter-of-a-percent.

Jerome Powell and his FOMC colleagues would have noted the prices paid component of the ISM Services PMI, the sub-index rising 2.5pts to 57.5, its highest reading since February. Survey respondents commented that some of the upside price pressures can be attributed to higher fuel prices.

From its late June lows below US$68/barrel WTI crude has advanced over 30% with a notable surge over the past two weeks, logging an intraday gain in 9 of the past 10 trading days. Marking Wednesday's high just shy of $88.00, WTI crude reached a 10-month high.

Crude oil advancing back through $100/barrel would be problematic for the Fed and other major central banks, stymying their efforts to return inflation to targeted levels.

Yesterday, Saudi Arabia announced it would extend its voluntary supply cut of 1MMbbls/d through to the end of the year. This came as somewhat of a surprise as the extension was expected to be a month, rather than for the remainder of 2023. The production cuts will induce a larger production deficit, continuing to support higher oil prices.

This could lead to a resurgence in headline inflation.

Whilst the Fed is universally expected to pause at the 20 September FOMC meeting, market pricing implies a 60% probability (up from 50%) the target rate will be raised by 25bps at the November meeting.

In other news from Wednesday, Bank of England Governor, Andrew Bailey appeared before the UK parliament. His comments regarding the BoE nearing the conclusion of its tightening cycle ensured the GBP was the worst performing G10 currency.

Against the pound, the Kiwi continues to chop around in a 0.4670 to 0.4730 range that has contained price action over the past couple of weeks, NZDGBP attempting to base following seven-year lows marked in the 0.4630's on 21 August.

Bailey's comments were at odds with market pricing that calls for a further ~60bps of tightening. A dovish repricing for the path of the bank rate would produce further GBP weakness.

Looking to the day ahead, the economic calendar delivers trade balance data for China and Australia, 2Q eurozone GDP and weekly jobless claims in the US.

Following Tuesday's pronounced sweep to the downside, NZDUSD ranged between 0.5860 and 0.5900 through Wednesday.  Ending the day near the bottom of the intraday range, NZD sellers retain the upper hand. The Kiwi looks susceptible to an extension below 0.5850.

Stuart Talman is Director of Sales at XE. You can contact him here.