US Yield Curve Impressively Bull Steepened

Markets

Higher bonds/lower yields was the ‘default’ trend so far this month and reinforced yesterday by comments from Fed’s Waller, usually one of the more hawkish members of the Fed MPC. Contrary to what was the case a month ago (strong US Q3 growth), he is becoming increasingly confident that Fed policy is well positioned to slow the economy in such a way that it can get inflation back to the 2% target. He of course warned that more evidence is needed that this trend can be sustained, but the conclusion for markets was straightforward. Fed’s Bowman is still prepared to raise the policy rate if progress on inflation stalls, but the tone of her comments was also more balanced/conditional. Especially the Waller interview was a good enough reason for markets to raise bets on an early Fed easing, with a first cut now discounted for the May meeting and a second one fully priced in for July. The US yield curve impressively bull steepened. The 2-y yield tumbled 15.4 bps. The 30-y yield eased 3.2 bps. The decline was fully due to a lower real yield (10-y -7.7 bps to 2.10%). The US 10-y yield dropped below 4.34 % support  (38% on the April October rise). The 2-y also gave up several corrective lows in the 4.80/71% area. German yields followed the US at a distance, easing between 8.1 bps (2-y) and 2.5 bps (30-y). Remarkably, the sharp decline in yields hardly supported equites (S&P +0.1%). The dollar was hammered. DXY dropped from the 103.2 area to close near 102.75. EUR/USD pierced 1.0960/65 resistance to test the 1.10 big figure. USD/JPY is extensively testing the 147.15 correction low from earlier this month. Gold was a major beneficiary (close $2041/oz).

Yesterday’s trends firmly continue this morning. US yields are again ceding up to 6 bps. The dollar remains under pressure (DXY 102.62, EUR/USD 1.1005). Asian equities are trading mixed to modestly lower. Later today , the focus turns the first November CPI releases from EMU member states (Belgium, Spain and especially Germany). German HICP inflation is expected to slow to -0.5% M/M and 2.5% Y/Y (from 3.0%). Several technical issues/base effects might complicate the interpretation and might be ‘reversed’ over the next couple of months. Even so, soft German inflation data probably will only reinforce the ST downtrend in yields also in EMU. Such a scenario might bring some more balance between the euro and the dollar. Still after breaking several support levels (including the 1.0965 area), the technical picture (and lower rates globally) suggests ongoing USD weakness.

News headlines

It’s four unchanged policy outcomes and six months on the spin now for the Reserve Bank of New Zealand after keeping the policy rate steady at 5.5% this morning. A policy rate hike was discussed, but in the end the MPC agreed that it was appropriate to wait for further data and information to observe the speed and extent of easing in capacity pressures in the economy with rates currently already restrictive and remaining restrictive for a sustained period of time. Some members added that there should be a low tolerance for any increase in the time to return inflation to target. Currently, the RBNZ expects it to fall below the upper bound of the 1-3% tolerance band in H2 2024. The central bank is especially concerned on the impact of stronger net immigration and future (stimulative) fiscal policy. Migration effects are already becoming visible on aggregate demand and risk keeping (core) inflation amongst others via housing rents and construction costs. In another hawkish tilt, the Committee noted that the estimate of the long-run nominal neutral policy rate increased by 25 bps to 2.50% with new OCR projections showing a higher peak rate next year (just below 5.75%), a slower start to rate cuts (mid-2025) and a higher rate at the end of the policy horizon (end 2026: 3.5%). NZD strength added to USD weakness, propelling NZD/USD to 0.62 (from 0.6130) for the first time since early August. NZD swap rates add up to 10 bps at the front end of the curve.

The monthly Australian CPI index rose by 4.9% Y/Y in October (vs 5.2% consensus), down from 5.6% in September and compared to the 8.4% peak in December 2022. The most significant contributors to the October annual increase were Housing (+6.1%), Food and non-alcoholic beverages (+5.3%) and Transport (+5.9%).Core inflation rose by 5.1% Y/Y (from 5.5% Y/Y in September). The Aussie dollar underperforms slightly this morning (AUD/USD 0.6640).