The rally in US bonds continued at full speed yesterday and bonds are on track for their best month since the GFC this November. The US 2-year yield fell from nearly 5% at the start of the week to almost 4.60% yesterday. Meanwhile, the 10 year yield rebounded from 4.25%. This represents a drop of almost 40bp in the US 2-year yield and 25bp in the US 10-year yield in just three days.
A faster decline in short-term yields means that the market is busy pricing in rate cuts (which we know it is), but the amplitude of the move is relatively large.
Yesterday’s US Q3 GDP was revised to a stunning 5.2% from the already high 4.9% previously printed. The consumer spending component was revised slightly lower and price pressures appeared to be softer than previously reported. But we could easily say that the Q3 performance of the US economy made China jealous!
If you dig deeper, even though yesterday’s 5%+ GDP print would have been an excellent trigger for a rebound in US bond yields and the dollar – on the belief that the US economy is strong enough to allow the Federal Reserve (Fed) to keep interest rates “high for long” – it also raised concerns (or hopes) that this incredible performance can’t last!
And guess what? The Atlanta Fed’s GDP Now forecast – which beautifully predicted last month’s outperformance – is now pointing to a sharp decline in US GDP growth to around 2% in the current quarter. Note that 2% growth in the US is still above average and shouldn’t be enough to convince the Fed to cut rates too soon if inflation doesn’t slow enough. But if inflation does slow, nothing will stop bond traders from continuing to rush in.
Today, all eyes will be on the US PCE index – the Fed’s favorite measure of inflation. The headline PCE may have eased from 3.4% to 3.0% in October, and the core PCE is expected to fall from 3.7% to 3.5%. A weaker-than-expected reading could further fuel expectations for an imminent Fed cut, while a stronger-than-expected reading should theoretically calm dovish enthusiasm and prompt a rebound in yields. Currently, Fed funds futures are pricing in an almost 80% chance of a May rate cut, and a 50/50 chance of a March cut.
EUR/USD Retreats Despite Weak Dollar
The rally in U.S. bond markets and falling U.S. yields are weighing on the U.S. dollar. The USDJPY extended its decline, finding sellers above the 100 DMA, while the EURUSD couldn’t extend its gains above the 1.10 level, as yesterday’s inflation data from some Eurozone countries was sufficiently soft. Spanish inflation fell more than expected to 3.2%, while German inflation fell more than expected to 2.3% in November. Eurozone overall inflation will be released this morning after the French and Italian figures, and slowing inflation is sure to give Euro bulls cold feet above the 1.10 level – although it’s not impossible that the pair could breach it on USD weakness.
Crude Oil Recovers Ahead of OPEC Decision
OPEC is expected to announce a much anticipated decision on its supply strategy today. The barrel of U.S. crude is back to $78 and ready to jump above the 200 DMA if Saudi Arabia gets a joint effort from other members to reduce supply.
Of course, OPEC will do its best to get the oil bulls on its side when it announces its decision today. But when expectations are high, they are harder to meet. Therefore, if a post-decision rally fails to push the price of a barrel above the $81pb level, the critical 38.2% Fibonacci support of the September-November selloff that should distinguish the actual bearish trend from the bullish consolidation, it may be a better idea to sell the tops.
COP28
70,000 people flew to Dubai this week to talk about how to reduce carbon emissions. 70,000 people. Staying where they were would certainly be a first step in gaining credibility on how to cut emissions. And that’s not all that’s absurd about this COP summit. The CEO of the National Oil Company of Abu Dhabi will chair this week’s summit. Yes, the CEO of a company that can only survive by keeping carbon emissions where they are. Moreover, the fossil fuel industry has been invited to participate more than at any other COP since the meetings began in 1995. You know, nothing says “let’s save the planet” like a summit chaired by a big oil CEO.
