Markets
In a session deprived of key economic data, (bond) markets were still looking for new input/a new equilibrium post last week’s rally. After a setback on Monday, bonds fought back, illustrating the absence of an unequivocal driver. US yields ceded between 1.7 bps (2-y) and 8.3 bps (30-y). Mostly hawkish oriented Fed governors (Bowman, Logan, Kashkari) basically indicated that growth remains strong and that it’s too early to conclude that financial conditions are tight enough to bring inflation back to target, even after the rise in long term yields since mid-July. The comments had little impact on trading. The $ 48 bln 3-y Treasury note auction went well, supporting the bond-friendly intra-day momentum. Even after yesterday’s setback, the US 10-y yield (4.6%) still has some margin left before reaching the key 4.50% support area. The move in European/German bond markets was even more outspoken with German yields declining between 3.9 bps (2-y) and 11.2 bps (30-y). Also here, there was little hard news to explain the move, except for weaker than expected German September production data. Long term German yields now again are nearing key support levels, with especially the 10-y yield testing the 2.685/2.63% area. Maybe the intraday collapse in the oil price was a positive external factor for bonds, illustrating market fears for ongoing soft global demand. Brent oil tumbled from the $85 p/b area to close the session near $81.5 p/b. The contract dropped below the $83.44 early October neckline and fully reversed the rise since the start of the Israel-Hamas conflict. Whether an oil price correction will be enough to change the inflation outlook in a sustainable way remains open to debate, but at least it might create some breathing space short-term. The impact of lower yields and a lower oil price on equities was mixed. Most European equities failed to avoid a negative close (Eurostoxx 50 -0.13%). US indices again outperformed (Nasdaq +0.9%). The dollar tried a further comeback off the post-payrolls correction low, but gains remain modest for now (DXY close 105.54, EUR/USD 1.07, USD/JPY 150.37). EUR/GBP closed again near the 0.87 big figure after gilts’ outperformance as BoE’s Pill didn’t excluded BoE rate cuts mid next year.
This morning, Asian equities fail to join the positive momentum from WS yesterday. US yields are regaining a few bps. The dollar still slightly outperforms (DXY 105.65, EUR/USD 1.0685). There are again hardly any important data, but plenty of ECB, Fed and BoE governors will give their view. The US Treasury will sell $40 bln of 10-y Notes. Most central bankers probably will hold their view. We look out whether BoE’s Bailey will join the soft assessment of its Chief economist. If so, EUR/GBP might weaken further beyond EUR/GBP 0.87. For EUR/USD, the test of the 1.0764/69 area is rejected for now, but the correction lower only develops in a very gradual way.
News & Views
The Financial Times conducted an interview with head of the IMF European department, Kammer, ahead of the publication of the institution’s annual report on Europe’s outlook. One of the topics raised by Kammer is that double-digit wage increases in central and eastern Europe risks eroding the region’s competitiveness with western European countries becoming reluctant to relocate production. Wages are expected to grow at a weighted average of 11% for 2023, slowing to 7% next year and 6% in 2025, according to the IMF outlook. Kammer indicates that these increases are not in line with productivity gains. The IMF’s good advice stretches from reducing budget deficits for governments to postponing policy rate cuts for central bankers. “Rates need to stay high at close to these levels for a considerable time for many of the central banks throughout 2024 in order to achieve their inflation targets in 2025.”
The NY Fed’s Quarterly Report on Household Debt and Credit showed total household debt increasing by 1.3% in Q3 (+$228bn) to $17.29tn. Details showed mortgage debt responsible for over half of the increase (+$126bn to $12.14tn). Credit card debt surged by 4.7% Q/Q (+$48bn to $1.08tn), consistent with strong consumer spending and real GDP growth. Outstanding student loan debt increased by $30bn and stood at $1.6tn in Q3 2023. Aggregate delinquency rates increased in Q3 2023, with 3% of outstanding debt in some stage of delinquency at the end of September. The NY Fed’s economic department indicated that “The continued rise in credit card delinquency rates is broad based across area income and region, but particularly pronounced among millennials and those with auto loans or student loans.”
