06:40 AM EDT, 09/05/2024 (MT Newswires) -- The US dollar (USD) remains offered early Thursday after higher Japanese wage data vindicates higher rates by the Bank of Japan (BoJ) and a first back-to-back increase in new (large-scale) orders since last December shows there is life in German industry, said Societe Generale.

The story is more nuanced in emerging markets (EM) foreign exchange (FX) where the Indian rupee (INR) plumbs a new record low and Mexico's peso (MXN) weakens to 20, wrote the bank in a note to clients. Bond yields remain soft on both sides of the Atlantic, with the steepening bias intact in 2y/10y spreads.

Investor positioning for bull steepening in the United States bond curve this year has been and still features as one of the crowded trades, stated SocGen. The 2y/10y spread reached a milestone on Wednesday and turned positive for the first time in just over two years after JOLTs job openings declined last month to 7.673 million (237,000 weaker), the lowest level since January 2021. This skews the risk towards an underwhelming nonfarm payrolls (NFP) print on Friday.

False dawns in bull steepening tactics have occurred along the way, most notably last December when the dovish Fed pivot was considered a turning point, pointed out the bank. Bull steepening momentum has been building in earnest since early summer when the spread bottomed around -50bps. The emergence of the loosening labor market in the shadow of inflation as the more prominent driver of Fed policy has galvanised positioning for tighter spreads.

Higher unemployment last month nudged the spread above -10bps and investors doubled up following the remarks, again on the employment situation, by Federal Reserve Chair Jerome Powell at Jackson Hole. The JOLTS data Wednesday pulled the spread over the zero line, and there is probably further to go -- the speed and scale will be determined by the nature of any US economic slowdown and the aggressiveness in Fed easing.

During the recession of the early 2000s (dotcom) and 2007/08 (GFC), the spread ranged between 250bps-280bps. However, if markets follows the roadmap and shallower cuts of 1995-1998, the spread will struggle to move beyond 70bps.

For the services ISM on Thursday, SocGen forecastsno change to 51.4; the consensus is at 51.3. Support for US Treasury (UST) 10s runs at 3.66%. The US dollar remains offered including against Norway's krone (NOK) over the last 24 hours despite the slump in oil prices, and the Canadian dollar (CAD or loonie) despite the dovish (third consecutive) 25bps rate cut by the Bank of Canada (BoC) on Wednesday. The comments by Governor Tiff Macklem suggest the BoC considered 50bps and so could ease again at the next meeting, added SocGen.

The European swap curve has largely followed the US over the summer but diverged on Wednesday, with 2s/10s stalling at -14bps. Reconvergence should take place if the Q2 labor market data for the eurozone on Friday reassures the Euroepan Central Bank (ECB) about receding wage inflation.

In China, the property market continues to be a drag on the economy after the value of new-home sales from the 100 biggest real estate companies plummeted 26.8% y/y to CNY251 billion ($35.4 billion) in August, exceeding the 19.7% drop in July. Regulators are reportedly considering trimming interest rates on as much as $5.3 trillion of outstanding mortgages, according to the bank. A reduction by up to 80bps could be sanctioned in two steps: a first cut soon would be followed by a second early next year. The changes would apply to first and second homes and would allow households to lower the mortgage burden whilst squeezing bank margins. Existing mortgages carried an average interest rate of about 4.27% as of end-2023.

The margins of Chinese banks dropped to a record-low 1.54% as of end-June, below the 1.8% threshold regarded as necessary to maintain reasonable profitability.

Elsewhere, USD/INR remains glued below 84.00 on touted US dollar selling by the Reserve Bank of India (RBI). In Central and Eastern Europe (CEE), Poland kept interest rates on hold at 5.75% as expected. Governor Adam Glapinski will hold a press conference later Thursday. EUR/PLN has so far defended technical support levels near 4.25 (April / May / July lows) but can it reclaim 200-DMA near 4.31 to confirm a meaningful rebound, asked SocGen.

The MXN traded a low of 20.00/USD after the lower house of Congress Wednesday approved the general text of President Andres Manuel Lopez Obrador's (AMLO) judicial reform proposal. The core objective is to elect judges by popular votes, and other individual articles of the bill will be discussed in Senate as early as tThursday. The ruling coalition requires just one more vote to reach the supermajority to pass the bill.

The reaction in the peso and the Mexican bonds was muted on Wednesday, stated SocGen. Peso woes and political developments are unlikely to derail another 25bps rate cut by the central bank (Banxico) later this month.

The central bank of Chile (BCCh) earlier this week cut 25bps to 5.50% and SocGen is pencilling in another 25bps cut this year and a terminal rate of 4% in 12 months. USD/CLP is edging towards 950.

In Brazil, Q2 gross domestic product (GDP) expansion of 1.4% q/q beat consensus but the likelihood of a rate increase may come down to consumer price index (CPI) next week. Money markets are pricing over 200bps in 12 months. SocGen forecasts no change.