The US Treasury’s $16 billion auction of 20-year notes stopped a full bp on the bid side at 1:00 pm, giving a new boost to the Treasury rally. Especially after the lackluster 30-year bond sale earlier this month.
Investors snapping up longer dated US debt is both a testament to the market’s belief in the Fed‘s soft landing scenario and indifference to deteriorating public finances for the time being. Indirect bidders took home 74% of the volume, the most since June 21. This is mainly foreign interest (e.g. central banks), but also domestic money managers bidding through primary dealers.
The auction cover was 2.58, the lowest in three months and well below the 1-year average, but markets ignored this detail. Daily changes in the US yield curve ranged from -0.6 bps to -3.9 bps after Treasuries recovered from early losses. The US 10-year yield closed just above 4.4%, approaching support at 4.34% (38% retracement of this year’s advance).
Trading volumes remained relatively light for the third consecutive session. The auction results also pushed U.S. equity markets up 0.6% (Dow) to 1.1% (Nasdaq). The S&P closed at its highest level since August, with the 2023 high within reach (4607 vs. 4547). The technical picture for the Nasdaq is similar with the 2023 top at 14447 vs. 14285.
The trade-weighted dollar (DXY) has fallen below the 50% retracement of the mid-July to early October rally (103.46), with the 62% retracement at 102.55. EUR/USD is already testing this 62% reference at 1.0960. The exponent of broad-based dollar weakness is USD/JPY, as the pair continues to drift away from the 150+ level (147.50).
Today’s economic calendar is extremely thin, with the minutes of the last Fed meeting and the ECB comments being the only highlights. They aren’t expected to change the underlying market drift.
Bank of England Governor Bailey said in a speech to the National Farmers’ Union after the European close that the U.K. central bank is “watching for further signs of inflationary pressures that may require interest rates to rise again. It’s too early to be thinking about rate cuts with services inflation far too high and wage growth still elevated.
He also mentioned upside inflation risks ranging from global economic fragmentation (prioritization of local markets when supply fails), events in the Middle East, energy prices and food production costs, and climate change (food prices). Bailey’s comments had no direct impact, but if anything they managed to halt the Pound’s slide. EUR/GBP closed below 0.8750 yesterday after opening at 0.8762. Bailey testifies before the British Parliament later today.
News and Views
The news agency Bloomberg had an early look at the European draft assessments of national budgets for 2024, which will be published later today. It reported that France risks being put on the European Commission’s watch list for ignoring the bloc’s fiscal rules, joining other potential candidates including Finland, Croatia and Belgium.
Germany and Italy are seen as not fully compliant, as are the Netherlands, Portugal and Slovakia, among others. It’s the first time since the pandemic that the EC has made this assessment. The fiscal rules, which limit deficits to 3% of GDP until 2023, were suspended in the wake of Covid-19 and the energy crisis.
The intervening period has been used to rework the rigid framework, but the lack of a general consensus among member states means the old rules will kick in again next year. Being on the list has no immediate consequences. It is up to the Commission to decide later whether to trigger the so-called excessive deficit procedure if countries at risk fail to correct the situation.
The Reserve Bank of Australia had discussed a fifth consecutive pause at the November meeting, the minutes showed, but opted instead for a hike to 4.35%. Policymakers noted that the risk of missing the 2-3% inflation target had increased.
Forecasts of the target being reached by the end of 2025 were based on one or possibly two more rate hikes, the minutes said. Australian money markets are pricing in only a 30% probability of another hike to 4.6%. There’s generally a low tolerance for too much inflation, with the minutes citing a scenario in which “even a modest further increase in inflation expectations would make it significantly more difficult and costly to return inflation to target within a reasonable time frame”.
In other words, a hike now is needed to prevent more aggressive tightening later. The Aussie Dollar briefly rose to its highest level since August this morning on the back of USD weakness, before paring its gains. AUD/USD is currently trading at 0.656.