US Yields Sharply Lower on Dovish Fed Comments

Market movers today

Focus continues to be on developments in the war between Israel and Hamas.

On the data front we get US NFIB small business optimism index. We also have more Fed speakers on tap and it will be interesting to see if they follow up on the comments from other Fed members yesterday highlighting the financial tightening from the recent rise in US yields.

In the Nordics focus will be on Norwegian CPI, see more below. Sweden also releases data on industrial orders as well as household consumption and monthly GDP indicator.

The 60 second overview

Risk sentiment improved overnight as dovish comments from Fed members fuelled a strong rally in US bonds in Asia after the US market was closed overnight. Fed Vice Chair Philip Jefferson said Monday officials could “proceed carefully” following the recent rise in Treasury yields. Fed member Lorie Logan from Fed Bank of Dallas stated the surge in long-term rates may mean less need for further tightening. Also risk markets calmed down from the initial uncertainty in the Middle East as there are not yet signs of a broader escalation of the conflict.

A top US general yesterday warned Iran to stay out of the conflict and US National Security Adviser John Kirby said the first tranche of a security aid package was on the way. US President Biden stated that at least 11 Americans had died in the attack by Hamas, which killed around 900 Israelis. Israel’s Prime Minister Benjamin Netanyahu said the response had “only started,” and “what we will do to the enemy will echo down through generations.”

Equities: Global equities ended yesterday higher as investors to a large extent concluded that the Middle East conflict would not end up having a material impact on the global economy. US cash bond trading was closed yesterday for Columbus Day holiday, but equity investors took notice of the futures market indicating the massive drop we see in yields this morning as cash bond trading reopened. Hence, bond markets ultimately had a bigger impact on equity markets yesterday than the conflict in the Middle East. In the US, Dow +0.6%, S&P 500 +0.6%, Nasdaq +0.4% and Russell 2000 +0.6%. Asian markets are higher this morning led by Japan bouncing back. European futures are catching up on the strong afternoon session in US yesterday. US futures are marginally higher.

FI: European rates staged a strong rally in the late trading hours, where the most dramatic moves were seen in the real yields as the 10y German real rate was 18bp lower on the day. 10y German Bunds ended 11bp lower at 2.77%. During the afternoon, Fed’s Logan said that the recent sell-off may reduce the need for additional rate hikes, and while the comments from Logan and the start of the rally coincided we find it unlikely that her comments were the catalyst for the rally as such. US was out for Columbus Day.

FX: Energy prices rose yesterday as the market digested the potential implications of the war between Hamas and Israel with oil rising above USD85/barrel. Sour risk sentiment across markets led to safe-haven currencies appreciating vs peers with both USD, JPY and CHF posing significant gains. Likewise, commodity sensitive currencies gained on the back of higher energy prices most notably EUR/NOK edging below 11.50. Today, the big event for NOK FX is the release of September inflation.

Credit: Markets were in risk-off mode after the resurgence of the Israel-Palestine conflict and credits were no exception. Itrax main widened 2.2bp to close at 87.7bp, while Itrax Xover widened 9.6bp to close at 463.2bp. The poor sentiment also quenched primary markets, which were fairly inactive.

Nordic macro

In Sweden the GDP indicator for August is due for release and we expect it to confirm the positive GDP momentum going into Q3 2023.

Growth in retail sales and net export of goods indicate growth, while a decline in hours worked points in a more negative direction. Also manufacturing production is likely to be on the weak side given a plunge in new orders in July and some weakness in NIER/PMI manufacturing index. All in all, data seems to suggest a positive trend in demand indicators (net exports, consumption) while the supply indicators (PVI, hours worked) are showing rather the opposite. Overall, however, we expect demand to have the upper hand.

In Norway, we expect core inflation to slow to 6.1% y/y, due mainly to base effects. This would be in line with Norges Bank’s projections in the September monetary policy report. Besides base effects, there are some signs that inflationary pressures may now be easing. After tumbling in the first half of the year, the krone has now stabilised. Together with lower global price pressures this will soon start to bring imported inflation down somewhat. We have also seen that producer prices for food have stopped rising, which could mean that food inflation at the consumer level has peaked.