Markets
The US yield curve is going after 5%+. Another sell‐off in Treasuries yesterday hurled yields between 1.3 and 8.2 bps higher in a move not driven by any particular news event. Real yields once again took the lead and brought the 10‐ year close to the early October cycle high (2.48%). As per close yesterday, only the 5, 7 and 10‐year nominal yields still traded sub 5%. But yields add another 3‐5 bps across the curve in Asian dealings this morning, narrowing that list down to just the 5‐ and 10‐year tenors. Every maturity but the 30‐y (a mere 2 bps short) is exploring new cycle highs. Monetary policy certainly plays a role through the higher‐for‐longer mantra and the balance sheet rundown. Fed’s Waller yesterday said he expected the latter could amount up to $2500 bn with the balance sheet currently already down $1000bn from the +/‐ $9000bn peak in 2022. Combined with the US stacking up huge deficits with no improvement expected in the foreseeable future, there’s a structural side to the yield increase as well (risk premia). German Bund yields added 2.8‐4.5 bps with the 2‐y yield being the exception due to a benchmark change. The dollar enjoyed a nice bid, both from UST underperformance and the risk‐off mood that the real yield surge triggered. EUR/USD dipped from a day’s high of 1.0594 to 1.0536. DXY bounced off 106 to finish at 106.56. USD/JPY can practically taste the 150 barrier. UK inflation eased less than hoped‐for in September, thus keeping the debate on a final BoE rate hike still alive. It offered some counterweight for sterling in a session where stocks shed 1‐1.5%. EUR/GBP closed near the 0.8678 resistance level.
Asian‐Pacific stocks follow the European and US example yesterday. Losses mount to 2% in China and even 3% in South Korea. Oil prices marginally ease to $91.05 (Brent) after the US suspended some sanctions on the Venezuelan oil, gas and gold sector. Risk‐off supports the US dollar as well as the Japanese yen. The Aussie dollar underperforms G10 peers with a disappointing labour market report acting as an additional drag. Today’s economic calendar is all about Fed speech with chair Powell going on stage at the Economic Club of New York as the highlight. We expect him to strike a similar tone as his colleagues. Several compared the recent yield rally as having the same monetary tightening effect at the final rate hike projected by the dot plot. It makes a November hike less likely but doesn’t exclude anything for December. For yields, however, the technical charts are probably the dominating factor for trading. As the 10‐y yield approaches the symbolic 5% level, it’s meteoric ascent could ease up a bit. We may even see some buyers stepping in from the sidelines. The US dollar may retain its strengthening bias throughout the day. EUR/USD’s October lows of 1.0448 acts as support but should be safe for today.
News and views
The Bank of Korea today as expected left its policy rate unchanged at 3.50%. The policy rate already stands at that level since the last BoK rate hike in January. The BoK maintains a tightening bias as it sees risks that upward price pressures might persist longer than previously expected, amongst other due to higher oil prices. CPI inflation in the country dropped to 2.3% Y/Y in July but reaccelerated to a faster than expected 3.7% Y/Y in September. The BoK sees its policy currently as being restrictive, but this will have to be maintained for a considerable period of time. Further deliberations on whether the policy rate needs to be raised further take into account the development of inflation, (elevated) household debt and monetary policy in major overseas economies. With respect to inflation, Y/Y price growth is expected to return to the low 3.0% area later this year. The Korean won remains in the defensive this morning with USD/KRW rising to 1358. This compares to the strong YTD level of the won at 1216.3 early February.
September Australian labour market data were slightly softer than expected. The economy added a net 6.7k jobs, coming on the back of a very strong 63.3 job growth in August. Full time employment even declined 39.9k while part time job growth printed at 46.5k. This suggests cooling in the labour market. The unemployment rate declined to 3.6% from 3.7%, but this coincided with a decline in the participation rate (66.7% from 67.0%). Next week’s inflation data will be a final key input for the November 7 RBA policy meeting. Markets currently expect the RBA to keep rates unchanged in November. Australian yields this morning jumped sharply higher (10‐y +13.5 bps) but this was mainly due to broader market trends. The Aussie dollar eased to AUD/USD 0.63, nearing the YTD low (0.6286) on a broader risk‐off sentiment.
