Markets
US Treasuries secured significant gains yesterday in a three-stage rally. The US Treasury Department ignited the move with the publication of the quarterly refunding statement. The total increase of auction sizes in the November-through-January quarter was slightly smaller-than-expected, with a bigger-than-hoped-for pivot towards issuing shorter and medium term securities. Treasury plans to increase the auction sizes of the 2- and 5-yr by $3bn/month compared to August-through-October volumes, the 3-yr by $2bn/month, and the 7-yr by $1bn/month. Increases of sales of 10-yr and 30-yr securities occurs at a slower pace than in the previous quarter (single additional step-up of $2bn and $1bn respectively) with 20-yr bond volumes even unchanged. Longer term Treasuries started outperforming short-dated ones after the refunding statement with the US October manufacturing ISM extending gains. The ISM faced an unexpected setback (46.7 from 49 and vs 49 consensus), erasing previous month’s increase. Details showed a steep drop in new orders (45.5 from 49.2) and a reduction in production (50.4 from 52.5), forcing companies into lay-offs (46.8 from 51.2). Ahead of the ISM, markets ignored a decent though below-consensus October ADP employment report (113k vs 150k expected) and rising job openings (JOLTS). The Fed and chair Powell had the final say after concluding their November gathering at which the central bank kept its policy rate unchanged at 5.25%-5.50% for a second straight meeting. The statement balanced more bullish connotations to growth (“expanded at a strong pace in Q3” vs “expanding at a solid pace”) and the labour market (“moderated since earlier in the year” vs “slowed in recent months”) with the addition of tighter financial conditions. Fed chair Powell stuck to his recent mantra to proceed carefully from here. He didn’t pre-commit to the December meeting, shielding with data dependence and the publication of two additional labour market and inflation reports by the time of the convening. During the Q&A-session, he tried to divert attention from economic resilience (and related inflation risks) to the ongoing disinflationary process. In yesterday’s bullish bond momentum this was seen as evidence that the final flagged rate hike in September dots is off the table, though Powell didn’t comment on that. The longed-for Fed pivot gave Treasuries the final push in the back while lifting spirits on stock markets (up to 1.65% for Nasdaq). US yields lost 14.4 bps to 20.7 bps yesterday with the belly of the curve outperforming the wings. From a technical point of view, this calls off recent tests of cycle tops like the psychological 5% mark for the 10-yr yield. First important support stands around 4.52% (October low). The US 2-yr yield tested this reference (4.92% October low), but bounces off this morning. The (trade-weighted) greenback traded volatile but held strong yesterday despite loss of rate support (DXY unchanged close at 106.65 though softer this morning). Central bank meetings in Norway, the Czech Republic and the UK are key today. A dovish hold by the BoE and gloomy outlook risks hurting sterling.
News and views
Japanese premier Kishida has announced another round of fiscal stimulus. The package tops JPY 17tn, of which three quarters will be funded by a supplementary budget for the remainder of the FY through March 2024. Measures include temporary tax rebates and cash handouts to low-earning households as well as support for businesses to raise wages. Kishida aims to help to cushion the impact of inflation on households and companies, who have been increasingly critical of the PM’s handling of the matter. Doing so, however, risks prolonging or even intensifying rising price pressures. The Bank of Japan as recently as Tuesday took another baby step towards exiting its very easy monetary policy. But this incremental approach hurts JPY. Even with yesterday’s triple blow to the US dollar, USD/JPY continues to trade above 150. A weak JPY is another factor fueling (imported) inflation.
Governor of the Bank of Canada Macklem believes the neutral rate is rising rather than declining. Macklem told Canada’s Senate economy committee that the impact of higher budget deficits, aging societies and larger investments in renewable energy need to be considered in the matter. He added that he wasn’t “totally comfortable” with policymakers leaving the estimate for the range of the nominal neutral rate between 2-3% in the annual review back in April. If the neutral rate would indeed be higher than before, it means the current policy stance (5% policy rate), all else equal, is less restrictive than previously thought.
