US bond traders are getting ahead of themselves, and it’s about to become a serious problem for the Federal Reserve’s (Fed) ‘last mile’ efforts – as the Fed officials should think carefully how to contain a too-early and too-high optimism from the bond markets – which will unwantedly loosen the financial conditions in the US before the Fed reaches its 2% inflation goal.
The US 10-year yield plunged below the 4.5% mark yesterday, even after a 40-billion-dollar sale of US 10-year papers saw lower-than-expected demand and resulted in a slightly higher-than-anticipated yield of 4.519%. Today, all eyes are on the $24 billion worth of US 30-year bond auction. The US 30-year bond yield plunged to 4.60% yesterday, after rising to 5.17% last month.
That’s disquieting; the US 10-year yield has now fallen more than 50bp in less than 2 weeks. Yes, a part of it is a correction of the accelerated rise that we observed starting from September. But that rise partly explains why the Fed members decided to refrain from announcing another rate hike at the latest policy meeting. As such, the recent fall in long-term yields will certainly get them back to a high alert level.
For now, investors count on the idea that the US jobs market has started slowing and that will continue. But sufficiently loose market conditions could keep the US jobs market in a health place, and spoil sentiment.
China has a different problem
China doesn’t have inflation and it can’t create it; that’s a problem. Released today, the latest Chinese CPI data came in worse than expected. The Chinese consumer prices fell 0.2% in October, on a yearly basis, versus no change expected, and producer prices fell 2.6%, slightly better than expected but not encouraging.
The soft CPI figures boost expectations for more Chinese stimulus and more interest rate cuts. And the news that high-level Chinese and US officials including Xi Jinping will wine and dine to improve their shaky relationship is encouraging, but the CSI 300 index remains poorly bid. The IMF recently rose its growth outlook for China to 5.4% this year, and 4.6% for next year, mostly on Beijing’s plans to issue more debt to get things going. But China’s severe property crisis, broken household and investor confidence warn that Beijing must either throw in mega stimulus measures or proceed with understandable structural reforms to bring investors back to China. In numbers, China recorded its first capital outflows on record, since 1998. Investors sold $11.8 billion more Chinese assets last quarter than they bought, and the outflows will continue unless something dramatically changes.
Oil’s race to the bottom
Worries regarding the Chinese economy don’t help lift sentiment in oil markets. The barrel of US crude fell to $75pb yesterday as the selloff continued at full speed. The selloff should slow as the market is now at the limit of oversold conditions, but investors are increasingly concerned about slowing global demand. Therefore, the supply side shocks, or potential supply side shocks are being mostly ignored. A fall below the $75pb level should open the door of a deeper fall to $70bp. We could however see a minor rebound to around the $78/80pb region before a deeper selloff.
