A 22bp intra-day rise in US 2-year yields is not something you see every day. But Tuesday’s US CPI report coupled with hawkish comments from the Fed triggered a sharp sell-off in bond markets sending yields higher and EUR/USD to the lowest level in more than a year below 1.11. The CPI report showed core CPI rising 0.3% m/m for the third month in a row, and the annual increase moved from 2.6% y/y to 2.9% y/y challenging the Fed’s mission to get inflation back to 2%. Prior to the release Fed governor Christopher Waller said that the Fed “should consider a 50-basis-point hike [in December] if October CPI data matched the previous two monthly readings“. Following the report, Chicago Fed’s Golsbee called the CPI print “borderline disturbing“. Markets now price a 13% probability of a ‘jumbo hike’ at the 9 December meeting. We look for a 25bp hike followed by another 25bp hike in March.
You would think equity markets would struggle in a week with such a sharp rise in yields. However, equities are currently driven by AI sentiment and following a sharp sell-off after the mid-term elections, AI sentiment recovered this week. Apart from being technically oversold, equities got help from a strong earnings report from CoreWeave, the neocloud company that recently caused jitters, and positive news on Anthropic’s IPO coming up next week, which is oversubscribed according to the company.
Oil prices fluctuated this week first moving below USD90 per barrel before recovering to USD96 per barrel on Friday. US President Donald Trump said on Sunday it is ‘highly unlikely’ he will order more strikes on Iran and data showed OPEC production has increased back close to pre-war levels. However, Iran halted two oil supertankers on Thursday and Trump stated Washington no longer needs a deal with Iran, which put new upward pressure on oil prices.
French government bond spreads to Germany tightened further this week to 153p after hitting 178bp on 22 October. The situation remains fragile, though. We had little data out of the Euro zone this week.
In China, export data showed more strength with a 35.2% y/y increase in October, lifted by a 15% rise in export prices due to the leap in memory chip prices this year. The jump in chip prices feed into electronics prices globally.
Next week the main event for markets will be the Anthropic IPO on Wednesday. Given the anxiety over AI lately, the IPO and how it trades in the coming weeks will be a litmus test of AI sentiment going into year-end. On the data front focus turns to US retail sales and Philly Fed, as well as German ZEW for November. Some indicators (such as metal price momentum) point to a roll-over in the global manufacturing cycle and the ZEW often gives a good indication of the direction for manufacturing. On the geopolitical front, China is hosting the annual APEC Summit in Shenzhen where Trump, Chinese president Xi Jinping and Russian leader Vladimir Putin are set to meet.
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