Markets
Day one after the big deception from the Bank of England confirms that upward yield momentum is seriously dented in the short run. Unreliable boyfriend Bailey lured investors by repeating that rates will still need to rise in coming months to keep inflation to target, but his comments didn’t meet with any market response. The upcoming two UK labour market reports will be decisive on the timing of a first rate hike (this year still or with the February monetary policy report). The Fed and US markets find themselves in a more or less similar situation (eyeing labour market); the only difference being that net asset purchases in the US still need to end (June 2022), before discounting rate hikes. The (bond) market reaction after today’s US payrolls was telling. The US economy added 531k jobs in October, beating 450k consensus. The September figure received an 118k upward revision. The unemployment rate fell from 4.8% to 4.6% against a stabilizing participation rate (61.6%). Average hourly earnings rose as expected by 0.4% M/M and 4.9% Y/Y. US Treasuries spiked lower immediately after the release, but rapidly retraced their steps. Once bitten, twice shy. The time/momentum isn’t ripe for better data to spoil bond market momentum after this week’s debacle. On the contrary, core bonds extended intraday gains after the release. US Treasuries do underperform against German Bunds and UK Gilts. The US yield curve bull flattens in a daily respective with yields losing up to 4.6 bps (30-yr). The German yield curve shifts in similar fashion with losses ranging between -1.6 bps (2-yr) and -7.2 bps (30-yr). UK yield lose 7.2 bps (2-yr) to 10.9 bps (30-yr). Lower real yields are the main culprit behind the recent setback in yields. The Japanese yen on the FX markets fails to undo some of the losses occurred during the September/October rate rally. USD/JPY treads water near 113.66. Current market settings suggest a better JPY performance. The greenback primes against EUR and GBP. The dollar did benefit (slightly) from the payrolls. EUR/USD set a minor new YTD low at 1.1514 with EUR/USD 1.1495/93 still being high profile support. The post-BoE rebound of EUR/GBP surprisingly sputtered just ahead of the 0.86 big handle with the pair changing hands near opening levels (0.8550). Stock markets continue to profit from yield dynamics with new all-time highs in the US and the EuroStoxx 50 testing the post-pandemic high at 5048.
News Headlines
Hungarian and Czech data painted a mixed picture. Industrial production in Hungary in September declined 0.3% M/M; the fourth monthly decline in a row. This caused production to print 1.7% lower compared to the same period last year. According to the Hungarian statistical office, the decline was due to supply chain issues in the automotive and the electronics manufacturing sectors. At the same time, Hungarian September retail sales were stronger than expected at 5.8% Y/Y from 4.1% in August. The Hungarian Finance Minister earlier this week warned that this year’s growth might be slower than the 7% estimate penciled in until now. Czech retail sales slowed more than expected in September, easing to 0.6% M/M and 3.6% Y/Y (down from 5.1% Y/Y August). Both central banks currently are engaged in a hiking cycle in order to arrest runaway inflation. The Czech national bank yesterday raised the policy rate sharply from 1.50% to 2.75%. On monetary policy tools, CNB governor Rusnok today said that the Bank board did not discuss using foreign exchange reserves as another tool to tighten monetary policy.
Canadian payrolls growth was – contrary to the US – less buoyant that expected in September. The Canadian Economy added 31.2k job gains mainly in the retail and wholesale trade (+80.5 k). Many other sectors saw a small setback in employment. The unemployment rate declined more than expected to 6.7% from 6.9%, but this was due to a decline in the participation rate (65.3% from 65.5%). The hourly wage growth rate for permanent workers improved from 1.7% Y/Y to 2.1% Y/Y. However, this level isn’t enough to change the assessment of the Bank of Canada on when to raise its policy rate. The BoC last week guided that the policy rate might be raised in the ‘middle quarters of 2022’. USD/CAD is trading little changed in the 1.2465 area.
