Positive US Economic Data Pushes Back Recession Calls
The market’s response to the latest US jobs data left little room for doubt, with solid performance across all key metrics. As a result, predictions of a US recession have been postponed once again. The big question now is whether the widely accepted ‘soft landing’ thesis could shift to a ‘no landing’ scenario.
As US economic data improved last week, the pricing of US interest rate swaps reflected a more gradual approach to future Federal Reserve rate cuts. Currently, a 25 basis point cut is expected at both the November and December FOMC meetings. This scenario, combined with strong corporate earnings forecasts and China’s aggressive liquidity and fiscal measures, is giving a boost to both the equity markets and the US dollar.
Geopolitical and Energy Supply Risks Remain
Despite the positive market sentiment, geopolitical risks and potential energy supply disruptions still pose threats. However, traders who remain long on risk assets entered the new trading week feeling optimistic, as no major market-moving events emerged over the weekend to dampen their outlook.
Can US Economic Exceptionalism Be Sustained?
Recent US economic data (JOLTS, ISM Services, and NFP) has outperformed expectations, forcing market participants to reassess their positions, especially in US Treasuries. Yields have surged higher, indicating that the narrative of US economic strength is back in focus. This has traders wondering whether the theme of US economic exceptionalism will persist leading up to the November elections, particularly if former President Trump’s odds of returning to office improve.
The Citigroup US Economic Surprise Index has reached its highest level since April, underscoring the trend of US data releases exceeding economists’ expectations. Although this has not yet cemented a consensus for a US exceptionalism trade or a strong long-USD position, it is undoubtedly contributing to the current market momentum.
US Treasuries Driving USD Flows
US 2-year Treasury yields closed last week up by a significant 36 basis points, aligning with the upward trend in the US economic surprise index. This movement in Treasuries indicates a potential retest of the 4% yield level, driven by a more gradual timeline for Federal Reserve rate cuts. The US dollar responded strongly, enjoying its best week since September 2022, with the USD Index (DXY) rising each day of the week. On a broader level, the USD gained ground against all G10 currencies, particularly the Japanese yen (JPY), amid speculation that the Bank of Japan might be making a policy error by shifting to a more dovish stance.
Fiscal Trends in Focus: Impact on EURUSD
In Europe, countries like France, Italy, and Spain are gearing up to implement more disciplined fiscal policies. For example, France is set to announce a budget aiming to reach a 3% deficit of GDP by 2029. In contrast, the US continues to grapple with rising debt levels, which could eventually weigh on the EURUSD pair, further supporting the US dollar’s dominance.
The combination of stronger-than-expected US economic data, rising Treasury yields, and divergent fiscal policies could extend the current bullish momentum for the US dollar and maintain the theme of US economic exceptionalism in the near term.
