A massive sell-off in bond markets over the past few weeks has pushed long-term U.S. government bond yields to new highs. The 10-year UST yield has risen 60 basis points over the past few weeks to currently trade at 4.72%, and is up 100 basis points since June and is near its highest level since 2007. Market inflation expectations rose only slightly, which caused real interest rates to rise significantly.
Clearly, with growth data generally in line with expectations, no clear macro triggers, and core CPI remaining on a downward trajectory, the Fed‘s message is very similar to the “longer-term higher” signal presented at the September meeting. So what happened? Many factors may have changed the supply and demand balance in the market. U.S. long-term bond issuance hit a record high, increasing bond supply. At the same time, demand appears to be declining in China and Japan as investors pile up long-dated bonds, demand weakens and the Federal Reserve conducts quantitative tightening (QT).
However, we believe this growth is unsustainable. It intensifies the financial tightening and poses downside risks to 2024 growth forecasts, which could lead to an early interest rate cut by the Federal Reserve. At the same time, U.S. private consumption is also facing other new headwinds, including the resumption of U.S. student loan payments on October 1 and rising gasoline prices eroding household purchasing power. There’s also a risk that as yields rise sharply, new skeletons will fall out of the cabinet, as happened with the collapse of Silicon Valley Bank in March. As a result, we continue to seek lower yields, with US 10-year Treasury yields falling to 3.70% on a 12M basis, See also Research – US: Yields won‘t necessarily stay high for long, October 5
The Fed hasn’t said much about the latest rise in yields, but Cleveland Fed President Loretta Mester did say Thursday that officials are watching the rise in yields, while adding that it’s not yet clear where yields will go. Will the rise continue?
On the economic front, there are some signs that global manufacturing may be at a turning point, at least temporarily. The U.S. ISM index for September showed that the new orders index rose to 49.2 from 46.8 in August and rose from a low of 42.6 in May. Asian export data has also improved recently, which is usually a sign of an inflection point in manufacturing.
However, this is likely mostly related to a shift in the inventory cycle, which will only provide a temporary boost if underlying demand does not improve, and we see downside risks to the latter. While manufacturing appears to be improving, the services sector has been weakening. This is also confirmed by the decline in the U.S. ISM service orders index from 57.5 in August to 51.8 in September. U.S. labor market data was mixed, with JOLTS job openings showing another increase and ADP employment data disappointing (U.S. non-farm payrolls data was released after the deadline for this report). We didn’t have much economic news in the Eurozone or China (which was in the middle of the Golden Week holidays), but on 2 October we published the Eurozone Macro Monitor: Data Still Supporting a Soft Landing , which outlined recent developments.
The focus will also be on the United States next week, when the Consumer Price Index (CPI) for September is released. We forecast both headline and core CPI to be below consensus, at +0.2% on a monthly SA basis (consensus is 0.3%), supporting the prospect of slower underlying inflation, and our forecast for the Fed to be on hold, especially It takes into account the latest situation. Financial crunch.
