The Markets
Higher bonds/lower yields has been the ‘default’ trend so far this month and was reinforced yesterday by comments from Fed‘s Waller, usually one of the more hawkish members of the Fed’s MPC. Contrary to what was the case a month ago (strong US Q3 growth), he is increasingly confident that Fed policy is well positioned to slow the economy in a way that will bring inflation back to the 2% target. Of course, he cautioned that more evidence is needed that this trend can be sustained, but the takeaway for the markets was clear. The Fed’s Bowman is still willing to raise the fed funds rate if progress on inflation stalls, but the tone of her comments was also more balanced/conditional.
The Waller interview in particular was reason enough for markets to increase bets on early Fed easing, with a first cut now discounted for the May meeting and a second fully priced in for July. The US yield curve has steepened impressively. The 2-year yield fell 15.4 bps. The 30-y yield fell 3.2 bps. The decline was entirely due to a lower real yield (10-y -7.7 bps to 2.10%). The US 10-y yield fell below 4.34% support (38% from the April-October spike). The 2y also made several corrective lows in the 4.80/71% area. German yields followed the US at a distance, falling between 8.1 bps (2y) and 2.5 bps (30y).
Remarkably, the sharp drop in yields did little to support equities (S&P +0.1%). The dollar was hammered. The DXY fell from 103.2 to close at 102.75. EUR/USD broke through 1.0960/65 resistance to test the big 1.10 level. USD/JPY is extensively testing the 147.15 correction low from earlier this month. Gold was a big beneficiary (closing at $2041/oz).
Yesterday’s trends are continuing this morning. US yields are back down as much as 6 bps. The dollar remains under pressure (DXY 102.62, EUR/USD 1.1005). Asian stocks are mixed to slightly lower. Later today, the focus will be on the first November CPI releases from the EMU member states (Belgium, Spain and especially Germany). German HICP inflation is expected to slow to -0.5% M/M and 2.5% Y/Y (from 3.0%). Several technical issues/base effects may complicate the interpretation and may be “reversed” in the coming months.
Nevertheless, weak German inflation data are likely to reinforce the ST downtrend in yields in the EMU as well. Such a scenario could bring some more balance between the euro and the dollar. However, after breaking several support levels (including the 1.0965 area), the technical picture (and lower global interest rates) points to continued USD weakness.
News and Views
It’s now four dovish policy outcomes and six months on the spin for the Reserve Bank of New Zealand after holding the cash rate steady at 5.5% this morning. A rate hike was discussed, but in the end the MPC agreed that it was appropriate to wait for further data and information to monitor the speed and extent of the easing of capacity pressures in the economy, with rates currently already restrictive and remaining restrictive for an extended period. Some members added that there should be a low tolerance for any increase in the time needed for inflation to return to target.
Currently, the RBNZ expects inflation to fall below the upper limit of the 1-3% tolerance band in H2 2024. The central bank is particularly concerned about the impact of higher net immigration and future (stimulative) fiscal policy. The impact of migration on aggregate demand is already visible and threatens to keep (core) inflation elevated via, inter alia, housing rents and construction costs.
In a further hawkish move, the Committee noted that the estimate of the long-run nominal neutral policy rate was raised by 25 bps to 2.50%, with new OCR projections showing a higher peak rate next year (just below 5.75%), a slower start to rate cuts (mid-2025) and a higher rate at the end of the policy horizon (end 2026: 3.5%). NZD strength added to USD weakness, pushing NZD/USD to 0.62 (from 0.6130) for the first time since early August. NZD swap rates added up to 10bp at the front end of the curve.
Australia’s monthly CPI index rose 4.9% y/y in October (vs. 5.2% consensus), down from 5.6% in September and down from a peak of 8.4% in December 2022. Housing (+6.1%), food and non-alcoholic beverages (+5.3%), and transportation (+5.9%) were the main contributors to October’s annual increase, while core inflation rose 5.1% y/y (vs. 5.5% y/y in September). The Aussie Dollar is slightly underperforming this morning (AUD/USD 0.6640).