The Markets
Bonds saw volatile swings yesterday following the release of a slew of US data and the ECB‘s policy decision. However, as has often been the case lately, the moves were more a reflection of internal market dynamics than the news. The first estimate of Q3 US GDP came in ahead of expectations at 4.9% qoq, with strong private consumption, gross private investment, government consumption and even inventory accumulation all supporting the strong growth performance.
Price indicators were mixed. The core PCE deflator fell slightly more than expected to 2.4% (from 3.7%). Durable goods orders were also strong in September (4.7%). Jobless claims rose a bit more than expected, but at 210k still suggest a solid labor market. Globally, the data confirmed the picture of a resilient US economy. US yields trended cautiously higher ahead of the data releases, but were caught up in a kind of buy-the-rumor-sale-the-fact dynamic afterwards. The bond rally was supported by a solid $38 billion 7-year US Treasury auction. In the end, US yields fell between 12.3 bps (5-y) and 8.1 bps (2-y). At least for now, yields near 5% still seem to be attracting some buying interest, regardless of the economic news.
As expected, the ECB paused the hiking cycle that began last July, raising the deposit rate from -0.5% to 4.0%. Inflation is still too high, but it has fallen significantly recently. The bank judges that interest rates have reached a level that, if maintained for a sufficiently long time, will make a substantial contribution to bringing inflation back to target. Lagarde didn’t formally call for an end to the hiking cycle, preferring a data-dependent approach. However, given the recent poor data, the bar for further hikes is high. The bank didn’t change its guidance to continue reinvesting proceeds from maturing PEPP bonds until at least the end of 2024. This can be seen as a soft touch. German yields ranged from minus 5.0 bps (2y) to unchanged (30y).
In other markets, the combination of solid US data and softer yields didn’t really help equities (Nasdaq -1.76%, Eurostoxx -0.59%). The dollar again couldn’t find a clear trend. The DXY closed little changed at 106.6, as did the EUR/USD (closing at 1.056). USD/JPY held north of the 150 level (150.40).
Risk sentiment is improving in Asia this morning, supported by solid results from the likes of Amazon after the WS close last night. Treasuries lose marginal ground. The dollar is little changed. Higher than expected Tokyo CPI data puts additional pressure on the BOJ to tweak its policy. However, the direct impact on the USD/JPY is limited (150.2). Later today, the economic calendar is thin, except for US September spending and income data and PCE price deflators (core expected at 3.7% vs. 3.9%). For the bond markets, we expect more technical trading ahead of next week’s FOMC meeting. The dollar may give up some ground if equities enter calmer waters after the recent sell-off. The EUR/USD is attempting to regain the October uptrend line (currently in the 1.057 area). If it succeeds, it could provide some short-term relief for the pair.
News and Views
Tokyo’s October inflation report, a bellwether for the national figure, came in surprisingly hot. The headline number was expected to come in at the same 2.8% pace as September, but instead accelerated to 3.3%. A core measure excluding fresh food ticked up from 2.5% to 2.7%. The same measure, which also excludes energy, eased marginally to 3.8%, but from an upwardly revised September figure of 3.9%. This puts the Bank of Japan in an increasingly tight spot. The BOJ is sticking to its view that much of the rise in prices is only temporary. The BoJ meets next week. Earlier this week, rumors circulated that it may lift the current 1% ceiling on 10-year yields at that meeting. Yields are rising due to inflation and the global environment, which may force the BoJ to defend the cap by buying bonds in an increasingly thin (and distorted) market. The Yen is paying a heavy price for the central bank‘s stubbornness. USD/JPY has broken through the symbolic (& intervention) level of 150 in the past two days.
China’s Securities Journal reported that there’s a “high probability” that the central bank will lower the reserve requirement ratio for banks in the current quarter. Such a move would free up liquidity needed to absorb the CNY 1 billion in additional spending the country announced earlier this week to support the economy.
