HomeContributorsFundamental Analysis10Y UST Yields above 3% ahead of FOMC – More to Come

10Y UST Yields above 3% ahead of FOMC – More to Come

Market movers today

On an otherwise quiet day on the data front, markets will keep an eye on Russia headlines, after discussions about a phased-in EU embargo on Russian oil are intensifying.

In the euro area, the unemployment figures for April will reveal whether there have been any adverse spill-overs to the labour markets since Russia’s invasion of Ukraine.

Ahead of the FOMC decision tomorrow, JOLTS jobs openings and quits will give more insights about the tightness of the US labour market during March.

The 60 second overview

Flash crash: According to Bloomberg a trading error at a London trading desk at Citigroup was behind the sudden drop in Swedish stocks of 8% that immediately spread to the other Nordic and European bourses yesterday. Note that markets very quickly normalised and the OMC Stockholm 30 Index closed down by 1.9% in line with other European indices.

10Y UST reach 3%: Yesterday, the psychologically important 3%-level was breached for the first time since 2018 as 10Y UST yields rose as much as 7.5bp. The move comes ahead of the FOMC meeting tomorrow where the Fed is widely expected to hike rates by 50bp and to officially announce that the balance sheet reduction (QT) will start next month with a USD 95bn cap every month. For more see Fed Research: Preview – 50bp rate hike published 28 April. The rise in nominal yields was driven by a 17bp jump in real yields to above zero (0.15%) for the first time since the pandemic started. Hence, 10Y break-evens fell more than 10bp during the session now standing at 2.83%. It was trading as high as 3.04% Friday afternoon. The big market moves yesterday shows that the market is slowly starting to price that the Fed will be able to keep inflation and inflation expectations in control through a higher real-yield. The latter is a clear tightening of financial conditions. We still see upside for UST yields from the current level. For more see Yield Outlook published 26 April.

US ISM fall back: The ISM manufacturing index declined more than anticipated in April falling 1.7 points to 55.4. New orders remained broadly unchanged (53.5 vs 53.8) but a sharp fall in the employment index from 56.3 to 50.9 was seen. Price pressure remains very high though “prices paid” eases slightly to 84.6 from 87.1. All in all the ISM index supported the market-unfriendly notion of “stagflation” – that is high inflation and weaker growth.

RBA: The Reserve Bank of Australia hiked rates by 25bp to 0.35% in its meeting this morning, a slightly larger hike compared to consensus expectation of 15bp. It also confirmed further rate hikes over the coming meetings, but did not yet specify plans for faster hiking pace. Tight labor market conditions are expected to lead to clear uptick in wages, and underlying inflation is projected to moderate towards RBA’s target range of 2-3% only by mid-2024. RBA noted that it does not plan to reinvest maturing bond holdings from the QE program, which ended in February, but so far it refrains from actively selling bond holdings. AUD/USD rose moderately following the decision, but AUD is unlikely to gain much long-lasting support in an environment where global and not least Chinese growth risks are rising.

Equities: Equities in different directions, as US rebounded from Friday’s markets and Europe was in catch-up. Sector performance reversed, with tech rebounding and defensives like consumer staples underperforming. However, overall sector performance is becoming less thematic with sectors such as real estate (bond sensitive) and materials (inflation winner) underperforming at the same time. S&P500 0.6%, Nasdaq 1.6%, Dow 0.3% and Russell 2000 1%. Futures point to another green opening today.

FI: A choppy Monday trading session without particular news driven events (and UK out) ended with a continuation of the recent trends in the past weeks, namely yields higher and spreads wider. 10Y Germany ended 3bp higher at 0.97% thereby approaching the 1% mark. Italy was yet again under pressure as spreads widened 5bp in the 10y point vs Germany. It is a rather quiet day on the data front today, as we await tomorrows Fed decision.

FX: EUR/GBP continues to range-trade around 0.84 as expected – we expect the BoE to stick to its more cautious language, which, if we are right, is likely to support EUR/GBP. Looking ahead we maintain a negative stance on the NOK.

Credit: With UK out there was no trading in CDS indices yesterday. Cash bonds, however, followed equities in red, with HY bonds closing the day 4bp wider and IG 1bp wider.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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