Markets
The US manufacturing ISM on Monday and US JOLTS job openings (9.61mn from 8.8mn vs stabilization expected) yesterday. Eco data provided the bearish bond trend with some additional ammo, delaying in time any US recession bets and keeping the Fed’s preferred soft landing scenario alive. US money markets for the first time attach a 50/50 probability that the US central bank will effectively deliver on its “promised” (via dot plot) final rate hike this year. The sell-off nevertheless centered again at the longer end of the curve. US yields added 4.7 bps (2-yr) to 13.5 bps (30-yr) in a daily perspective. Since the Fed delivered the 5%+ message until end 2024 at the September 20 policy meeting, the US 10-yr yield and 30-yr yield increased by 44 bps and 50 bps respectively driven by higher real rates. Both are obviously at cycle and multiyear highs respectively at 4.85% and 4.97%. The US 10-yr real rate (2.43%) overtook inflation expectations (2.40%) for the first time since 2009. Other (global) core bonds followed US Treasuries south with the Fed’s course serving as a template for the rest. German yield changes varied between -1.7 bps (2-yr) and +7.6 bps (30-yr). The German 10-yr yield closed at a cycle high 2.97% and is about to pass beyond 3% for the first time since June 2011. The German 30-yr yield closed at 3.21%. The trade-weighted dollar closed off the intraday highs yesterday following a suspicious move in USD/JPY. The pair was fighting the psychologic 150 threshold which is seen as line in the sand for Japanese officials. As the pair tried to make its way beyond 150 following JOLTS data, it was countered by strong JPY inflows, pulling the FX rate temporary to USD/JPY 147.50. Currently, we’re back around 149.25, adding strength to our case that Japanese officials won’t be able to fight a strong USD without backing by a BoJ policy U-turn. Stock markets were wacked again with key European indices losing over 1% and Wall Street losses ranging between -1.3% (Dow) and -1.9% (Nasdaq). Technical pictures become more and more dire, with the trading pattern shifting to sell-on-upticks. We don’t fight ruling trends today even though the eco calendar might cause some additional 2-way volatility with ADP employment change and the services ISM scheduled in the US. The key European focus is on ECB President Lagarde’s speech at a monetary policy conference in Frankfurt with often overlooked Q2 Italian deficit data serving as a wildcard. As the Italian spread over Germany (10y) is on the verge of passing 200 bps for the first time since end of last year.
News & Views
The Reserve Bank of New Zealand this morning kept its policy rate unchanged at 5.50%. The Monetary Policy Committee assessed that interest rates are constraining economic activity and reducing inflationary pressure as required. Even as GDP growth in the June quarter was stronger than expected (0.9% Q/Q 1.8% Y/Y), the RBNZ expects demand in the economy to continue to slow. Weakening global demand is putting downward pressure on New Zealand export volumes and prices. Global import prices (ex oil) are seen easing. While the imbalance between supply and demand is moderating, the RBNZ indicates that a prolonged period of subdued activity remains required to reduce inflation, supporting the case to keep policy restrictive. At the same time, the RBNZ in the press release didn’t given a clear hint on further tightening. The central bank sees a near-term risk that activity and inflation do not slow as much as needed. Over the medium term, a greater slowdown in global demand, particularly in China, could weigh more on commodity prices and New Zealand exports. Markets expected a more hawkish tone. The 2-y government bond yields eased 3 bps after the decision (5.79%). The kiwi dollar dropped to NZD/USD 0.59.
Kevin McCarthy, the Republican Speaker of the US House of Representatives, was removed from his function as the House in a 216-210 vote approved a ‘motion to vacate’. Eight Republicans joined the 208 democrats in the vote. The vote came after opposition within the Republican party led by Matt Geatz, after McCarthy last week needed the support from democratic representatives to approve a bill avoiding a partial government shutdown. The House now needs to look for a new speaker, but there remains a high degree of dissent within the Republican party. The current situation de facto brings legislative action to a halt. A new agreement to fund the US government is needed by mid-November to again prevent a government shut-down. Also other key topics including US aid to Ukraine might be blocked in the process.
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