Curve inversion/outperformance of the long end was the name of the game in core bond markets yesterday. US yields fell between 1.4 bps (2y) and 11 bps (30y). The US 10-year yield closed near the key reference level of 4.50%. German yields showed a similar picture. The 2-year still gained 3.1 bps, but the 30-year fell 8.1 bps. The German 10-y yield also closed below the 2.68% neckline at 2.62%, suggesting that further downside may be on the cards in the short term.
The rise in EMU short-term yields was at least partially explained by the ECB‘s consumer expectations survey. EMU consumers expected a sharp rise in inflation over the next year in September, at 4.0%, up from 3.5% in August. If this trend continues, it will leave the ECB little room to ease its anti-inflation campaign. At the same time, consumers have become more negative about the economy and the labor market for the next 12 months.
Uncertainty about (global) growth is likely a driver of the recent rally in long-dated bonds. ECB speakers (Lane, Nagel, Vujcic, Makhlouf) yesterday at least kept the focus on inflation rather than growth and indicated that it’s too early to start the debate on (potential) easing. The oil price continued its downtrend, which may have also supported the momentum in longer-dated bonds.
Brent oil even closed below $80/b. Elsewhere, European equities enjoyed constructive momentum. The EuroStoxx 50 was up 0.6% (and off its intraday highs). US indices showed no clear trend and ended little changed.
On the currency markets, the dollar gave up early gains. The DXY closed little changed at 105.6. After testing the 1.066 level, EUR/USD actually closed with a small gain at 1.071. USD/JPY was the exception to the rule, closing just below the key 151 level. EUR/GBP regained the 0.87 level as markets pondered recent comments from the likes of BoE Chief Economist Pill regarding the timing of a potential BoE rate cut in the middle of next year.
Asian stock indices are mostly trading in positive territory this morning. China underperforms. China’s CPI (-0.2% y/y) and PPI (-2.6% y/y) moved (further) into deflationary territory, suggesting mediocre growth momentum. US Treasuries are trading little changed, as is the dollar (DXY 105.55, EUR/USD 1.071).
Later today, weekly U.S. jobless claims are interesting and may provide some guidance for intraday bond market momentum, but apparently are not a game changer. Central bank speeches will once again dominate market headlines, with many ECB and Fed governors weighing in, including ECB Chair Lagarde and Fed Chair Powell. ECB speakers recently have mostly pushed back against bets that tightening is done, and we don’t expect that to change anytime soon.
Fed Powell will speak at an IMF conference discussing monetary policy challenges in the global economy. Markets will be looking for his assessment of financial conditions after the recent market repositioning.
A wait-and-see attitude in the current environment could prolong the bond market rally and be a temporary negative for the dollar. The US Treasury will also sell $24 billion of 30-year notes.
News and Views
Data from the U.S. Department of Agriculture showed that the average price of beef sold in U.S. stores and supermarkets rose to nearly $8 per pound, a record high. Live cattle prices are trading near $1.8 per pound on the Chicago Mercantile Exchange, also near record highs ($1.87). Years of low rainfall and the rising cost of hay and other feed used to fatten cattle in the absence of grass have prompted farmers to reduce their cattle herds.
Arabica coffee prices rose to their highest level since June (over $1.7 per pound) despite good harvests in top exporter Brazil. A stronger Brazilian real and port congestion (delaying shipments) may be at play.
Soybean prices rose to their highest level since mid-September ($13.85 a bushel) on strong Chinese demand and concerns that dry weather in northwestern Brazil could reduce production there.
Minutes from the Bank of Canada‘s last policy meeting showed that policymakers were split on the need for another rate hike after pausing at 5% in October. They are keeping the door open because the transmission from higher rates to weaker growth and lower inflation is rather slow.
Officials raised their near-term inflation expectations, saying that higher oil prices, rents and housing costs, and the slow normalization of business prices are limiting the disinflation process. They also noted elevated inflation expectations and wage growth. Canadian money markets believe we’ve seen the peak in interest rates, with a first rate cut discounted until early H2 next year.