Global markets yesterday succeeded a surprising ‘all‐asset rebound’ with both bonds and equities gaining despite multiple indications that geopolitical tensions will unlikely disappear anytime soon. Central bank/Fed guidance was the dominant factor. (Some) Fed members including Vice Chair Jefferson, recently launched the thesis that tightening via higher LT bond yields might reduce the need for further Fed hikes. Fed Bostic yesterday also saw a good chance that rates have been raised enough. However, this is no consensus view and there are important nuances. Fed Daly of late also supported Jefferson’s view, but yesterday indicated that the neutral policy rate might have risen to the 2.5%‐3% range. Fed’s Kashkari was more balanced/agnostic on the impact of the rise in LT yields for Fed policy. However, markets are giving more weight to the dovish side of the story. A slight rise in the NY Fed’s inflation expectations was largely ignored. US yields fell between 14,8 bps (5‐y) and 11.1 bps (2‐y). Probably due to the sharp decline in yields yesterday, the $46bn US 3‐y Note auction only yielded a ‘mediocre’ outcome. German yields intraday tried a cautious rebound after Monday’s decline, but in the end the US‐driven trend was too strong. The German 2‐y yield gained modestly (+3.1 bps). The 30‐y eased 1 bp. Recent ‘tension’ on intra‐EMU government bond markets also eased with the 10‐y Italian spread vs Germany declining 11 bps (back at 1.95%). The combination of easing global monetary conditions and hope on additional fiscal stimulus in China, propelled equities. The Eurostoxx 50 added 2.25 % and revisits the previous range bottom near 4200. US indices gained 0.4%/0.6%. A context of sharply lower US (real) yields and an outright risk‐on sentiment, implied a further modest USD correction. DXY dropped from about 106.05 at the close on Friday to 105.75. EUR/USD tested the short‐term top near 1.062, but the (euro) momentum was unconvincing. USD/JPY even succeded a minor gain (close 148.7).
Asian equity markets join yesterday’s risk rally with Korea outperforming (2%+). US bonds are trading mixed with short‐term yields rising a few bps while the US long bond outperforms. Later today, we look out for the ECB CPI inflation expectations, US September PPI, and the FOMC minutes. Given recent Fed comments, the focus will be on the US. US PPI is expected at a rather moderate 0.3% M/M and 1.6% Y/Y. The Fed minutes probably sound more hawkish compared to the current debate on the impact of higher long‐term yields. The US 10‐y yield at the time of the meeting was about 50 bps below last week’s top. At that meeting, a majority of the Fed governors reconfirmed their view that at least one more hike was probably needed. We also look out for any internal debate on a higher neutral rate. Even so, we don’t expect tentatively hawkish minutes to derail the rebound in Treasuries. Short‐term developments suggest some USD softness with the 1.0635/1.043 area (previous low; 23% retracement since July top) first important resistance.
News and views
The NY Fed’s Household Survey showed that inflation expectations increased slightly at the 1‐yr and 3‐yr horizons (3.6% to 3.7% and 2.8% to 3%) while decreasing on the 5‐yr term (3% to 2.8%). Median inflation uncertainty increased slightly across all three horizons. Labor market expectations were mixed with unemployment expectations deteriorating and perceived job loss risk improving. Households’ perceptions and expectations for credit conditions deteriorated slightly. The average perceived probability of missing a minimum debt payment over the next three months increased by 1.4 percentage points to 12.5%, the highest reading since May 2020.
The FT reports that Bank of England officials are pushing for tighter liquidity requirement for GBP‐denominated money market funds. Under the recommendations, money market fonds would have to hold up 50% to 60% of their funds in assets that can be liquidated within 7 days compared to 30% currently. The guidance comes as the BoE published its quarterly financial stability statement in which it also warned for material leveraged positions in US Treasuries by hedge funds and the UK households are under pressure from higher living costs with a notable rise in the percentage of households with a high debt burden.