Central Bank Speak will once again dominate the market headlines


Curve inversion/overcoming the long end was the name of the game in the major bond markets yesterday. US yields advanced between 1.4bps (2y) and 11bps (30y). The US 10-year yield closed near the key 4.50% benchmark. German returns showed a similar picture. The 2-year still gained 3.1 bps, but the 30-year fell 8.1 bps. Germany’s 10-year yield at 2.62% also closed below 2.68%, suggesting further declines could be in the near term. The rise in short-term EMU yields was at least partially explained by the ECB’s survey of consumer expectations. Consumers in the EMU were expecting a sharp rise in annual inflation to 4.0% in September from 3.5% in August. If this trend continues, it gives the ECB little room to ease its anti-inflation campaign. At the same time, consumers turned more negatively on the economy and the labor market during the following 12 months. Uncertainty about (global) growth is likely the driver behind the recent rally in long-dated bonds. ECB spokesperson (Lane, Nagel, Vujcic, Makhlouf) yesterday at least focused on inflation rather than growth and indicated that it is too early to start a debate on (potential) easing. The price of oil continued its downward trend, which could also support the dynamics of bonds with longer maturities. Brent oil even closed below USD 80 p/b. In other markets, European shares recorded a constructive pace. The EuroStoxx 50 gained 0.6% (and off intraday highs). US indices showed no clear trend, little changed. In the FX markets, dollar gave up early gains. The DXY closed little changed at 105.6. After testing the EUR/USD 1.066 area, it closed at 1.071 even with a small profit. USD/JPY was still the exception to the rule with a close just below the 151 big number. EUR/GBP regained the 0.87 barrier as markets considered recent comments from BoE Chief Economist Pill on the timing of a possible BoE rate cut in the middle of next year.

Asian stock indexes are mostly trading in positive territory this morning. China is performing poorly. China’s CPI (-0.2% Y/Y) and PPI (-2.6% Y/Y) moved (further) into deflation, indicating moderate growth momentum. US Treasuries are trading little and so is the dollar (DXY 105.55, EUR/USD 1.071). later today weekly US jobless claims are interesting and may provide some guidance on intraday dynamics in bond markets, but it obviously doesn’t change anything. Central bank talk will once again dominate market headlines, many ECB and Fed governors have expressed their views, including ECB President Lagarde and Fed President Powell. ECB spokespeople have been mostly hedging bets recently that tightening is done, and we don’t expect that to change any time soon. Fed Powell will speak at the IMF conference on monetary policy issues in the global economy. Markets will be watching his assessment of financial conditions after the recent market repositioning. A wait-and-see attitude in the current environment could prolong the recovery in the bond market and be a preliminary negative for the dollar. The US Treasury will also sell $24 billion worth of 30-year bonds.

News and views

Data from US Department of Agriculture showed the average beef prices sold in American stores and supermarkets climbed to nearly $8 a pound, record high. Live cattle prices are trading near $1.8 a pound on the Chicago Mercantile Exchange, also near a high ($1.87). Years of low rainfall and rising costs of hay and other forage used for fattening without grass have forced farmers to reduce livestock numbers. Arabica coffee prices rose to their highest level since June (exceeding $1.7 per pound) despite a good harvest in major exporter Brazil. A stronger Brazilian real and port congestion (shipment delays) may be at play. Soybean prices rose to their highest level since mid-September ($13.85 per bushel) due to strong Chinese demand and concerns that dry weather in northwest Brazil could reduce production there.

Minutes from the Bank of Canada’s previous policy meeting showed that policymakers were divided on the need for an additional rate a 5% increase after their October break. They are keeping the door open because the transmission from higher rates to weaker growth and lower inflation is rather slow. Officials raised their near-term inflation expectations, saying higher oil prices, rents and housing costs and a slow normalization of business prices were limiting the process of disinflation. They also saw increased inflation expectations and wage growth. Canadian money markets think we’ve seen cap rates with the first cut in key interest rates discounted early in the second half of next year.

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