The Markets
The new week of trading began yesterday with a countermove to last week’s overall easing of financial conditions. Perhaps the market got a bit ahead of itself in declaring an end to the Fed‘s tightening cycle, or at least it was too early to pencil in rate cuts before next summer.
Unlike last week, there was little economic news to “explain” the move. Technical levels probably played a role, with US yields testing key support levels (e.g. 4.50% for the 10-year) at the end of last week. Upcoming supply may also have been a good reason for investors to become more cautious and rush further into bonds (US Treasury refinancing starting today).
Whatever the reason, US yields rebounded yesterday between 9.6 bps (2y) and 4.2 bps (30y). At 4.635%, the 10-year US Treasury yield once again provided some respite from the 4.50% benchmark. Overnight, Minneapolis Fed Governor Kashkari joined yesterday’s market sentiment by warning that it’s too early to declare victory on inflation. More data is needed to be sure that “the inflation genie is back in the bottle”.
EMU/German yields followed the broader rally, but as was the case on Friday, the curve movement was again somewhat different from the US (bear steepening, 2y +6.2 bps; 10y +9.4 bps). The ECB‘s Holzmann, admittedly a notable hawk, came to a similar conclusion as Kashkari (not declaring victory yet). Doubts about the scope for early (Fed) easing also blocked this rebound in equities. US indices closed with limited gains (Dow +0.1%, Nasdaq +0.3%).
The first important resistance levels (Dow 34148, S&P 4394, Nasdaq 13714) are being tested or are within reach, but have not yet been overcome. The same goes for the Eurostoxx50 (+0.38%, ST high at 4.234). Oil ($85 p/b) barely gained even as Russia and Saudi Arabia extended production cuts.
The dollar halted Friday’s sell-off, but its performance remained unconvincing (DXY 105.21 from 105.02, EUR/USD 1.0718 from 1.073). The Pound underperformed both the Dollar (Cable closed at 1.2344) and the Euro (EUR/GBP closed at 0.8682).
Asian markets are back in risk-off mode this morning. China’s October trade data showed a mixed picture with exports (USD -6.4% y/y) disappointing.
Imports rose more than expected (+6.4% y/y). US Treasuries are slightly higher, as is the dollar (DXY 105.4). Later today, economic data (US trade balance, German production) won‘t have much impact on trading. The interest rate markets will keep a close eye on the $48 billion sale of 3-year Treasury notes.
However, technical trading may take over again. In the interest rate markets, yesterday’s price action suggests that a sustained drop below last week’s lows won’t be so obvious. In the currency markets, we will be watching to see if the dollar can benefit more from a global risk-off than it has recently. The Pound (EUR/GBP 0.868) is barely reacting this morning to mediocre BRC October Retail Sales (+2.5% y/y from 2.8%).
News and Views
The Reserve Bank of Australia raised its cash rate by 25 bps to 4.35%, breaking a four-meeting pause in which it judged that higher interest rates were balancing the economy and that some tightening effects were yet to be felt. Today, however, it concluded that the rate of decline in the CPI toward the target was slower than anticipated in the August projections.
The latest reading “suggests that while goods price inflation has moderated further, prices of many services continue to rise briskly”. Inflation is seen at around 3.5% by the end of 2024 and at the upper end of the 2-3% target by the end of 2025. The risk of inflation (expectations) being higher for longer against the backdrop of a stronger-than-expected economy and a still tight labor market therefore warranted another rate hike. The RBA said the uncertainties around the outlook were significant and often two-sided.
Further tightening in such circumstances will depend on the data and the evolving assessment of risks, it said. The Australian dollar’s attempt to rally on the not fully discounted rate hike was short-lived. After touching AUD/USD 0.65, the pair turned south and is currently trading around 0.648. Australian government bond yields fell by 2.9-3.3 basis points.
The Fed’s Q3 Senior Loan Officer Opinion Survey (SLOOS) showed yesterday that lending standards are tightening across all types of loans. In the business segment, respondents reported tighter standards and weaker demand for commercial and industrial loans to firms of all sizes. Tighter standards and weaker demand were also reported for all categories of commercial real estate loans.
Consumer lending tightened and demand weakened across all residential real estate loan categories. The same was true for credit card, auto, and other consumer loans.
