Image Source: Global macro and markets:
Global markets: A disappointing auction for 30Y Treasuries yesterday fed through to higher yields across the curve. The yield on the 30Y bond rose 15bp to 4.765%, and that lifted yields on the 10Y (+14.9bp to 4.624%) and also the 2Y (+8.8bp to 5.02%). Despite nosing below 4.5% the other day, it looks for now as if yields are happier this side of that line, though will get tested again next week as US inflation numbers look set to drop sharply. Our US economist, James Knightley, thinks that US inflation could drop to around the target range by 2Q24. Jerome Powell took a tough line in his remarks early this morning at the IMF conference, saying that the Fed wouldn’t hesitate to hike if needed and that the inflation fight had a long way to go. These comments may also have helped to lift yields. Powell’s tone makes sense. There is no point in corralling the market into expecting cuts until shortly before they look necessary. However, there will come a point where the rhetoric and the macro diverge to such an extent that either markets call the Fed’s bluff, and start to price in cuts, or the Fed has to do an abrupt turn and throw in the towel. For now, though, further tough talk is likely. Whether this transforms into tough action will depend on the run of the macro data. Higher yields gave the USD another lift, and EURUSD dropped back to 1.0665. The AUD, which has been trading heavily since the RBA hike, dropped to 0.6360. Cable is down to 1.2216 and the JPY has risen up to 151.35. Asian FX was slightly softer yesterday against the USD, and will likely soften further today in line with the overnight G-10 FX moves. USDCNY is back to 7.2846 and pushing back in the direction of 7.30. US stocks don’t like these higher yields, and the S&P 500 dropped 0.81% yesterday. The NASDAQ was down 0.94%. Chinese stocks were mixed to flattish, with the CSI 300 up just 0.05% and the Hang Seng down 0.33%.
G-7 macro: There was nothing too exciting on the macro calendar yesterday. Even the weekly US jobless claims were close to expectations, with a slight overshoot for the continued claims numbers. There is no US data to speak of today, and UK production and trade figures dominate the G-7 calendar. These won’t have any broader bearing on markets outside the UK.
Australia: The RBA has released its November statement on monetary policy. We did not think that the statement released with the earlier rate hike decision was particularly dovish, though the market certainly seemed to think so. We don’t think this longer more detailed statement is particularly dovish either, but the link is included above, so have a read and make up your own mind. Once again, the market seems to have decided that whatever the content of the statement, lower yields are the way to go. We think that a bit of reflection may see that view reverse in time. That said, we do think rates have probably peaked. But there are risks to this view. The first is that inflation may well increase again when October data is released. Secondly, the monthly run rate (MoM% increase in the price level) has been 0.6% for the last two months, and that is way too high to be consistent with the RBA’s inflation target. So that needs to drop, or there is still a chance, in our opinion, that rates have to rise again next year.
India: September production data will be released later this evening, and the consensus forecast is for a drop from the 10.3% YoY rate of growth recorded in August, to just 7.0% in September. This would be consistent with a decline in the level of production, as implied by the sub-50 PMI index in September. We wouldn’t be surprised if the production growth figure came in a fair bit higher than that, as we aren’t convinced that, despite the PMI numbers, we will see an actual contraction in activity in September.
What to look out for: India industrial production and Fed speakers
India industrial production (10 November)
US University of Michigan sentiment (10 November)
Fed Bostic and Logan speak (10 November)
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