October 24, 2023

Markets Today – Good Mood (in bonds at least)

A quiet night for data, but a big night for bonds.

Todays podcast

  • Volatile moves in bond yields amid a quiet night for data/news
  • US 10yr yield hits intra-day high of 5.02%; now -6.4bps to 4.85%
  • Equities pare initial losses as yields retraced; S&P500 -0.2%
  • USD weak across the board amid yield retracement; DXY -0.5%
  • Oil falls, delayed Israeli ground operation hinting at containment?
  • Coming up: RBA’s Bullock, Global PMIs, UK Employment, Earnings

Key data/events

BBG: Ackman, Gross Abandon Bearish Bond View as Yields Bounce Off 5%

Nothing to lose; I’m in a good mood now; What do I do; I’m in a good mood; All you want is the old me”, Good Mood, The Rubens, 2023

A quiet night for data, but a big night for bonds. The US 10yr yield hit an intra-day high of 5.0187%, but not soon after fell back to finish at 4.85% (low 4.83%) and is down -6.5bps over the past 24 hours. Why the big moves? Unclear. It could be 5% is now proving attractive with the real yield as given by the 10yr TIP yield trading recently as high as 2.54%. There were also two comments by investors that captured headlines. Former bond king Bill Gross tweeted “regional bank carnage and record rise in auto delinquencies to long-term historical highs indicate US economy slowing significantly. Recession in 4th quarter…’higher for longer’ is yesterday’s mantra ”. Bill Ackman also tweeted that he covered his bond short, noting “there is too much risk in the world to remain short bonds at current long-term rates. The economy is lowing faster than recent data suggests”. The notion the US economy is slowing against resilient official data was first advocated by the Fed’s Barkin last week.

US fed funds pricing is little changed with the Fed universally expected to be on hold in November and there is only a cumulative 9.4bps worth of hikes priced by January 2024. Pricing of cuts though has expanded slightly with -82bps priced for 2024, from -80bps on Friday and -76bps this time last week. Equity markets moved alongside the volatility in Treasury yields. The S&P500 fell -0.2% today, but at one point it was down -0.8%. The NASDAQ though did close up 0.3%. Key earnings come after the close today with Alphabet and Microsoft reporting, though there is also plenty of non-tech names too (see Coming up for details). One interesting move not usually covered in our dailies is Bitcoin which is up some 4.5% over the past 24 hours to $31,212; a US court has cleared the way for a crypto ETF, perhaps by year’s end.

In FX, the USD broadly reflected the moves in yields. At one point the DXY was up +0.2%, but reversed and is now -0.5% with most major pairs reflective of that: EUR +0.7%, GBP +0.7%. Both the AUD (+0.3%) and NZD (+0.4%) underperformed and the NZD did fall to a fresh year-to-date low of 0.5808, before the reversal in the USD and the NZD currently trades at 0.5849. For the AUD, the lows seen earlier this month held and, after dipping below 0.63, the currency trades at 0.6335. JPY has been remarkably contained despite the volatility in yields. The market reaction to Sunday’s Nikkei report saw another push higher in Japan’s 10-year rate, to a fresh 10-year high of 0.86%, while the yen was largely unperturbed. USD/JPY briefly traded above 150 in early Sydney, before settling just below that figure (USD/JPY -0.2%).

In developments on the Israel-Hamas war, Israel continues to hold off on its planned ground assault on Gaza , against a backdrop of further diplomatic efforts to prevent the conflict from spreading. Bloomberg reports insiders suggest growing calls inside Israel for a rethink of the planned ground invasion, due to the uncertainty about the fate of over 200 hostages being held in Gaza, fear of Hezbollah in Lebanon invading Israel from the north, and the risk of heavy Israeli military casualties. Meanwhile, Israel continues with its aerial bombardment of Gaza and with strikes at Hezbollah forces in Lebanon. The oil market continues to trade as if the conflict won’t spread to involve large oil producers like Iran. Brent crude -2.1% to $90.19. Gold more steady at -0.3% to $1,974.79.

Coming up:

  • AU: RBA’s Bullock: Governor Bullock speaks on “Monetary Policy in Australia: Complementarities and Trade-offs” at 7pm tonight. The recent Minutes and last week’s ‘fireside chat’ were more hawkish and plays to the view the RBA hiking rates if Q3 CPI on Wednesday prints above their August SoMP forecasts, as is NAB’s view. The key messaging from the fireside chat was that inflation was proving sticky – “There’s a few things that are suggestive that it’s going to be difficult to get inflation down” and ” services inflation – inflation in things like takeaways, hairdressers, restaurants, those sorts of things – that inflation is running at a bit over 4 per cent… So it’s above our target and it’s pretty sticky…”. The RBA Minutes also showed limited tolerance for an upside inflation surprise: “The Board has a low tolerance for a slower return of inflation to target than currently expected” (see NAB note AUS: RBA Governor sounded as hawkish as the Minutes). Note Ms Bullock speaks again on Thursday.
  • EZ: Global PMIs & EZ Bank Lending Survey: Preliminary manufacturing and service sector PMI’s for October provide an update on the pulse of activity. European markets are much more sensitive to the PMIs than US markets. Consensus for the Eurozone composite sits at 47.4, little changed on last month’s 47.2. Further stabilisation or very modest upticks in Europe would help broader sentiment and narrow the gap between the European and US services sector; one factor behind persistent Euro weakness. Firm conclusions on whether the US continues its emphatic relative outperformance may need to wait for the closer watched ISMs the following week. Also of some relevance ahead of the ECB this week is the Euro Area Bank Lending Survey, showing how policy is translating to tighter credit conditions.
  • UK: Employment data & PMIs: Expect a dogs breakfast of a labour market report. The ONS produced average earnings data on 17 October but delayed the publication of employment and unemployment data due to concerns about the decline in the response rate to the survey. Still, we expect a further softening of the labour market as tighter monetary policy bites, with lower employment and job vacancies alongside slightly higher unemployment. The latter at 4.3%, up from a cycle low of 3.5% is rising more quickly than its peers. The PMIs will also be important with consensus for the composite little changed at 48.5.
  • US: No top-tier data, just earnings: Note the global PMIs for the US are usually not market moving. On earnings, Alphabet, Microsoft, Spotify, Visa, Coca Cola, General Motors, and General Electric all report today.

Market Prices

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