Breakfast Bites - Yields put pressure on markets

Rise and shine everyone.

The big news continues to be bond yields. Yesterday, after Chair Powell’s hawkish comments on the economic outlook at the IMF, 2Y bond yields rose steadily crossing 5%. During the speech, Chair Powell was interrupted by climate protesters but that wasn’t really the highlight of the event. What the market noted was the Fed Chair saying that monetary policy may not be sufficiently restrictive and that inflation numbers have done “head fakes” before. All eyes will now be on the CPI report that comes out next week in the US, because once again, inflation is front and center.

Prior to that speech however, we saw a poor bond auction for the 30Y, with demand coming in weaker. This shouldn’t come as a surprise because with the biggest buyer of bonds (the Fed) stepping aside, the market has less capacity to absorb bonds particularly, with the yield curve remaining inverted. If you can buy bonds for a shorter term and higher earning, why would you lock up your money for 30 years. Long term bond yields need a premium if they are to attract investors.

The equity markets did not like the spike in yields and we saw the SPX break one of its longest winning streak of 8 days. US Equity futures are trading marginally lower this morning alongside higher yields. But the yield curve has not steepened much, and remains at -0.39% suggest the move is being driven by shorter term yields and a potential Fed hike / lower rate cuts. Gold and the US Dollar remain flat while Oil is trading slightly higher. There’s some speculation now that OPEC+ may continue with production cuts into next year. Bitcoin however, is soaring back above 37,000 now.

Asia and Australia

• Asian equities falling across the region Friday. Markets in risk-off mode following Powell's comments on interest rates. Japan's Nikkei set to close lower but at least off its trough, Australia closed down. Another sharply lower day for Hong Kong, mainland shares relatively outperforming. Sustained losses everywhere else although none seeing a decline of over 1%.

• PBOC Governor Pan Gongsheng said risks in China's property sector are "manageable" and there is significant demand for residential housing upgrades in long-run, providing support for housing market. Pan noted an average of 0.8 ppt of interest rate has been reduced for existing mortgages since policy rollout in August, translating to an annual reduction of CNY170B ($23.3B) in interest payment for 50M households. Equity markets not particularly impressed by the news.

• Meanwhile, fears of tight liquidity conditions persist in China. Chinese banks doubled issuance of negotiable certificates of deposit (NCD) to more than CNY1T ($137B) this week, largest weekly issuance on record. Beijing's authorization of CNY1T sovereign bond issue is thought to have constricted liquidity and left banks in need of cash, helping to fuel NCD borrowing costs to a six-month high.

• The Reserve Bank of Australia put out new inflation forecasts showing that the inflation may not return to the 2-3% band until 2025. GDP forecasts were upgraded and unemployment rate projections lowered. Forecasts assume cash rate peaks at around 4.50% (vs current 4.35%), suggesting one more hike possibly in February.

Europe, Middle East, Africa

• European equity markets lower. Consumer non-durables lagging while Energy outperforms with a slight recovery in oil prices.

• The UK narrowly misses a recession. 3Q Preliminary GDP Growth came in at 0% QoQ vs. the estimate of -0.1%. Last quarter was +0.2%. This has left YoY GDP growth flat at 0.6%. Consumer spending, business investment and government spending all fell in Q3, leaving the economy underpinned by a better trade performance. The economy is not out of the woods however, and Q4 estimates thus far are negative, projecting a winter recession.

• Dutch TTF gas prices remain near lowest levels in past 12 months, but analysts see bullish arguments increasing. In recent note, Bernstein noted demand showed the first signs of structural recovery for months in October, driven by industrial and heating sectors. Start of the heating season was colder in Europe, with temperatures across NW Europe in October 0.6°C lower than 2022.

The Americas

• Bank of Mexico holds rates at 11.25%, as expected. However, the policy statement was more dovish and signals a possible change in stance early next year.

• Initial claims for the week to 4-Nov were down 3K w/w to 217K, a touch below consensus for 218K, while prior week revised up 3K to 220K. Continuing claims for week to 28-Oct up 22K w/w to 1.834M, above consensus for 1.819M, while last' week's print revised down 6K to 1.812M. The 4-week average gives us more perspective, and we’re seeing the numbers rise steadily, implying weakening in the labor market and likely higher unemployment numbers on the horizon.

Chart of the Day:

Retail traders sold nearly $16 billion in stocks last month, nearly twice what they unloaded in September, according to S&P Global Market Intelligence. They dumped shares in nearly every sector, although they increased their exposure to real estate. - Bloomberg

Calendar

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)