Higher Bond Yields, Lesser Hikes?

Thoughts of the Day

The US 10-year bond yield has risen from 4.35% before the September Fed meeting to 4.89% currently. This move is likely to be heavily discussed by the Fed officials in their policy meeting tomorrow. If they think it reflects market risk premium, it will mean that there is less need for them to hike more.

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Day Ahead

Euro area inflation is expected to show that prices rose +3.2% Year-on-Year in October, down from +4.3% previously. The core inflation rate is expected to show a +4.2% gain YoY, lower than +4.5% previously.

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What Happened Yesterday

Market Movements as of New York Close 30 Oct 23
  • The Bank of Japan kept interest rates at -0.1% in its monetary policy meeting as unexpected. There were also no changes to the 10-year yield upper bound of 1.0%. The JPY weakened as a result with the USDJPY rising more than +0.3% from 149.44 to above 149.9. The USDJPY broke above 150.1 momentarily and is currently trading around the 150 level.
  • The US Treasury Yield curve inversion remained at 0.15% as the US 2-year bond yield and the US 10-year bond yield increased +0.04 to 5.03% and 4.88% respectively.
  • The US stock futures opened higher but traded flat in the early Asian hours of Monday before drifting higher in the later half of the session, into the London trading session. The S&P 500 futures were up +0.70% from last Friday’s close before the New York session began.
  • The US stock market opened higher from Friday and had a whipsaw in the early New York session. It then started to drift higher for the remainder of the session. Consequently, the S&P 500 closed the day higher at +1.20% (high: +1.46%, low: +0.38%), the Dow rose +1.58% (high: +1.81%, low: +0.37%) while the Nasdaq increased +1.09% (high: +1.47%, low: +0.32%).
  • Surprisingly, the crypto market was quiet on a day with improved risk sentiment in the US stock market. Bitcoin inched lower by -0.20% while Ether gained +0.78%.
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Headlines & Market Impact

Treasury to borrow $776 billion in the final three months of the year

Notable Snippet: The U.S. government’s borrowing needs will decline slightly in the final three months of 2023 from the prior quarter, a potentially important development during a turbulent time for the global bond market.

In a closely watched announcement Monday afternoon, the U.S. Department of the Treasury said it will be looking to borrow $776 billion, which is below the $1.01 trillion in privately held marketable debt the department borrowed in the July-through-September period, the highest ever for that particular quarter.

The borrowing level appeared to be somewhat below Wall Street expectations — strategists at JPMorgan Chase said they expected the announcement to be around $800 billion.

The Treasury said it expects to borrow $816 billion during the January-through-March period, which is the government’s fiscal second quarter. That number appeared above Wall Street estimates, as JPMorgan said it was looking for $698 billion. The record for quarterly borrowing happened in the April-through-June stretch in 2020, when borrowing hit nearly $2.8 trillion during the early Covid-19 pandemic days.

The department said it expects to maintain a $750 billion cash balance for both quarters.

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Bank of Canada says high rates, slow growth will impact govt spending

Notable Snippet: The Bank of Canada on Monday said higher interest rates and low growth will impact the federal government’s budget spending and although the country’s fiscal position is sustainable, expenditure should be contained to protect social programs.

“Lower growth and higher interest rates will certainly impact on the government’s budget,” Governor Tiff Macklem told lawmakers in the House of Commons.

“I don’t think fiscal policy in Canada is in a situation where it’s unsustainable. But I do think protecting our very good fiscal position is important” for social programs and prosperity, he said.

Macklem also reiterated his message from last week, when the bank left its key overnight rate unchanged at a 22-year-high of 5%.

“We held our policy rate steady (last week) because monetary policy is working to cool the economy and relieve price pressures, and we want to give it time to do its job,” Macklem said.

“We will continue to assess whether monetary policy is sufficiently restrictive to restore price stability, and we will monitor risks closely,” he said.

What we think: This is the case we expect with the US economy as well with the Federal Reserve likely to continue with its pause on interest rate hikes this week. High interest rates and slower growth may be what most major economies will be contending with in the months ahead as the impact of previous aggressive rate hikes continue to filter through the economy.

China factory activity returns to contraction in Oct

Notable Snippet:  China’s manufacturing activity unexpectedly returned to contraction in October, an official factory survey showed on Tuesday, casting a cloud over recent indicators that showed a nascent recovery in the world’s second-largest economy.

The official purchasing managers’ index (PMI) fell to 49.5 in October from 50.2, dipping back below the 50-point level demarcating contraction from expansion. The reading also missed a forecast of 50.2.

China’s top parliamentary body last week approved a 1 trillion yuan ($137 billion) sovereign bond issue in the fourth quarter, and passed a bill allowing local governments to front load part of their 2024 bond quotas to support investment and economic growth.

Earlier this month, the central bank injected the biggest cash support since late 2020 via short-term policy loans to allow banks to extend credit as well as keep interest rates low.

China’s economy grew at a faster-than-expected clip in the third quarter, while consumption and industrial activity last month also surprised on the upside, suggesting the recent flurry of policy measures is helping bolster a tentative recovery.

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Phan Vee Leung
CIO & Founder, TrackRecord