Yesterday’s US economic data ranged from a lower than expected PPI to a decent headline but weak underlying NY manufacturing index to above consensus retail sales. Ultimately, markets focused on the latter, allowing yields to recoup some of the previous day’s sharp CPI-driven losses. Treasury yields rose between 7.3 and 8.7 bps, with the belly of the curve outperforming. In an interview with the Financial Times, Fed‘s Daly welcomed the slowdown in price increases but warned against declaring victory over inflation just yet.
A stop-start mentality (announcing the end of the hiking cycle only to reverse course later) would damage credibility, she added. Daly, who votes next year, noted that rate cuts will not happen for a while. German yields rose 2.2-5.7 bps in a steepening. In both regions, however, markets are holding on to the idea that central banks will start cutting rates around mid-2024, with tentative pricing for an even earlier move in either May (Fed) or April (ECB).
Against this backdrop, equity markets have remained resilient despite the rise in yields. It’s all about expectations for a unique soft landing scenario. European stocks rose by 0.55% (EuroStoxx50) and Wall Street by 0.47% (Dow Jones). The trade-weighted U.S. dollar bounced off 104 support to close at 104.38. The EUR/USD gave back a fraction of Tuesday’s massive gains. The pair closed at 1.0848. The Pound slid after a small miss in CPI also sealed the BoE‘s fate in the eyes of the markets. The EUR/GBP rose to 0.8736.
All eyes in the Asian session this morning were on the Biden-Xi meeting, the first face-to-face meeting in a year. Both sides welcomed the progress made, but it had little impact on the markets. The US Senate passed a stopgap funding bill overnight. In doing so, Congress averted the threat of a shutdown this Friday, only to postpone it until early next year.
The perennial debacle is rarely a major issue for the markets. But these last-minute deals highlight the ongoing polarization that several rating agencies (most recently Moody’s) have cited as one of the reasons for downgrading the credit outlook. The economic calendar later today has little to offer other than the weekly U.S. jobless claims. There’s an avalanche of (high-profile) ECB and Fed speeches.
They serve as a wild card for trading. In any case, we don’t think they will be able to dramatically turn the tide on core bond yields. Gravity remains strong for the time being, with the next support for the US 10-year yield coming in at 4.34% and around 2.50% for the German 10-year yield. The dollar remains vulnerable if soft landing bets continue to support equity markets. EUR/USD 1.0945 is the upside reference on the technical charts.
News and Views
The Australian economy added 55,000 jobs in October, according to data from the Australian Bureau of Statistics. Markets were expecting an increase of around 24k. Most of the growth came from part-time jobs (37.9k). However, the reacceleration followed modest job growth in September. In fact, the average gain over the past two months was slightly lower than the average over the past year.
The unemployment rate rose from to 3.7% as the participation rate increased from 66.8% to 67%. Growth in hours worked has slowed recently, pointing to a softening in labor demand. The fact that job growth has been driven mainly by part-time rather than full-time jobs points in the same direction.
In this respect, the strong headline data probably doesn’t call for immediate further action from the Reserve Bank of Australia. The 2-year Australian government bond yield is currently little changed at 4.23%. After yesterday’s rebound, the Aussie Dollar is once again losing the big figure of AUD/USD 0.65. (0.6475).
Czech Central Bank Deputy Governor Jan Frait said in an interview yesterday that he sees external and domestic conditions in favor of lowering borrowing costs. Frait was one of the two MPC members who voted for an initial 25bp rate cut at the November meeting, but didn’t get it.
He admitted that he couldn’t predict when the majority of policymakers would support a cut. He noted that central bankers face a big dilemma as they are “worried about the last mile and whether inflation won‘t get stuck in people’s heads and whether they won’t demand significantly higher wages” that are inconsistent with bringing inflation back to the 2.0% target on a sustainable basis.
Frait said that other MPC members were also cautious at the November meeting as they wanted to assess the extent of traditional price increases in January. Frait sees less of a need for this as the bank should be forward looking. The CNB’s next policy meetings are scheduled for December 21 and February 8 next year.