Below trend growth to continue
The bond selloff continued overnight in what was a very quiet night for newsflow. The US 10yr hit a 16yr high of 4.55%, now 4.53%, and up some 11.2bps over the past 24 hours.
GE: IFO expectations, Sep: 82.9 vs. 83.0 exp.
“You raise me up, so I can stand on mountains; You raise me up, to walk on stormy seas”, You Raise Me Up, Josh Groban 2003
The bond selloff continued overnight in what was a very quiet night for newsflow. The US 10yr hit a 16yr high of 4.55%, now 4.53%, and up some 11.2bps over the past 24 hours. Ditto yields elsewhere with the German 10yr at 2.80%. The rise in nominal yields continues to be fully reflected in TIPs with the US 10yr TIP yield up 12.7bps to 2.18%. The implied inflation breakeven was little changed at 2.36%. Curves bear steepened (2s10s +7.6bps to -59.8bps). The rise in US yields continues to support the USD with DXY up 0.3% and to a fresh high for 2023. Meanwhile newsflow out of China remains on the negative side. Evergrande scrapped a debt restructuring plan, while one survey of iron ore demand ahead of Golden week suggested buyers were holding back. Iron ore futures fell -5.0% and USD/CNH rose 0.2% to 7.31.
The higher for longer view remains the prevailing theme from last week’s FOMC and the US Fed’s Goolsbee today said that the risk of inflation staying higher is still the bigger risk and that the debate will soon shift to how long to hold rates high. Reduced conviction on the potential for rate cuts next year has been a key force behind steeper yield curves recently. Markets now price 77bps worth of cuts in 2024, down from 117bps at the beginning of September. As for the near term outlook, markets price around a 50% chance of a hike by January 2024. Equities have been surprisingly resilient with the S&P500 up 0.4% with fairly broad-based gains across most sectors (see CNBC interview: Risk of inflation staying higher than where we wanted is the bigger risk). As for yields, one former bond king (Bill Gross) who had been arguing the US 10yr would hit 4.50%, is now neutral on where we go from here.
The USD has continued its upward trend evident since mid-July and the DXY index broke 106 for the first time this year , up 0.3% for the day, with EUR -0.6% and trading below 1.06, and GBP -0.2% and trading below 1.22. The Yen has also been modestly weaker (USD/JPY +0.3% to 148.85), the dovish BoJ last week and higher global rates not helping, but USD/JPY met some resistance just below 149. China’s troubled property developer Evergrande was back in the news after it scrapped a debt restructuring plan because its property sales were worse than expected and an investigation into one of its subsidiaries barred it from issuing new bonds. Its share price plunged over 20% and set off a fall in other property developers. China’s CSI index ended the day down 0.7% while Hong Kong’s Hang Seng index fell 1.8%.
As a result, there was downward pressure on the yuan and this spilled over into a weaker AUD (-0.2% to 0.6425). A factor in this dynamic was tumbling iron ore prices, with futures down much as -5.0%, with talk of buyers holding back amid persistent weakness in China’s property market. Metal prices were broadly weaker on the LME, with copper (-1.1%), aluminium (-0.4%), zinc (-1.3%) and others all lower. In economic news, German business confidence, as measured by the IFO survey, was little changed in August, in line with the consensus, with the expectations component nudging up to 82.9, consistent with the economy remaining in a mild recession. In the US the Dallas Fed Manufacturing Index was -18.1 vs. -14.0 expected.
Finally in Australia it is again another quiet day as far as data is concerned, ahead of the Monthly CPI Indicator on Wednesday. One article in the AFR worth noting is coverage of average pay in new collective agreements hitting 4.7%. The latest 174 deals lodged from August 12 to August 25, reached an average annual increase of 4.7 per cent and extended to 63,553 employees. The increase is the highest average recorded since the commission’s data series began in mid-2022, surpassing previous pay highs of 4.4 per cent (see AFR: Pay rises surge, close in on inflation).
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