The Markets
The US yield curve hit a weekly low yesterday with declines ranging from 7.4 to 10.3 bps. Wednesday’s unconvincing rebound was indeed a head fake and was completely erased a day later by a slew of sub-consensus economic data. These included jobless claims, industrial production and the NAHB housing index. They pointed to a slowing economy and, more importantly, a slowing labor market. German yields followed the US trend, falling 4.4 to 6.6 basis points across the curve.
The moves in core bond markets this time around didn’t spark a risk-on rally like we saw earlier in the week. Stocks were lower in Europe and flat in the US. Oil prices slumped 4.6% (Brent $77.42/b) on demand concerns as well as supply not being as constrained as expected as non-OPEC+ producers stepped in to offset the cartel’s (voluntary) output cuts. Gold prices gained 1%.
Currency markets favored the big three: USD, EUR and JPY, with the latter outperforming on a daily basis. USD/JPY eased to 150.73 while EUR/JPY gave back some of the big gains of the past few days. EUR/USD approached 1.09 before settling in the mid 1.08-09 range. EUR/GBP mirrored these moves with an intraday high of 0.87665 only to close at 0.8742.
The Yen continues to lead the G10 in this morning’s quiet Asian session, shrugging off dovish comments from BoJ Governor Ueda. He expects inflation to slow in FY2025, adding that there isn’t enough certainty that the central bank can sustainably achieve its price target. US Treasury yields recover 1-3 bps in technically insignificant trading.
Today’s economic calendar won‘t provide much inspiration. US housing data is worth following as this market is increasingly suffering from rising unaffordability (high mortgage rates and prices due to low supply/availability). If anything, a miss to the downside is more likely to reinforce current market thinking than the other way around. Central bank speeches will once again flood terminal screens. Many, if not most, of those who have spoken recently show little willingness to toy with the markets.
But neutral or even hawkish comments can’t compete with what the data is telling us. The correction lower in core bond yields may slow, but it’s unlikely to reverse heading into the weekend. Support to look for in the US 10-year yield is at 4.34%. The German 10-y is approaching the upward sloping trendline connecting the 2023 correction lows (but the March lows).
As long as markets continue to believe that the Fed can cut rates more aggressively, dollar weakness may prevail. The downside for EUR/USD looks solid. This morning’s poor UK retail sales figures conclude this week’s economic update. Sterling is sliding, pushing EUR/GBP north to 0.8755. A weekly close above 0.871/0.873 (50% retracement of the EUR/GBP 2023 decline) worsens Sterling’s technical picture.
News and Views
Activity in the US housing market is declining sharply according to the National Association of Home Builders sentiment index. The NAHB sentiment index fell from 40 to 34, the lowest reading on record. Both the current and future single-family sales indexes fell sharply, as did traffic of prospective buyers.
Sentiment also fell in three of the four regions surveyed. However, comments from NABH Chief Economist Robert Dietz were somewhat more reassuring than the survey data as he was quoted as saying that recent macroeconomic data points to improving conditions for home construction in the coming months.
Given the lack of existing home inventory, somewhat lower mortgage rates will price-in housing demand and are likely to set the stage for further improved views of market conditions in December,’ the NAHB was quoted.
According to comments from the officials of the Budget Committee of the German government, the final deliberations on the German draft budget for 2024 have been interrupted early this morning. The suspension of deliberations follows a ruling by the German Constitutional Court earlier this week.
As a result of the ruling, the government is facing a funding gap, as the court ruled that the government can’t transfer €60 billion in funds that were made available during the pandemic to be redirected to initiatives that support the green transition and other industrial projects. Nevertheless, the government expects the final budget figures and new debt figures to be released after a meeting next Thursday, instead of this week as previously planned.
