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Last Week’s Highlights
10Y yields collapsed… What drove the move? Last week’s price action was dominated by the collapse in long-end yields, which fell almost 30bps (Charts 1 and 3). Several factors drove this move.
- On Monday, the US treasury announced it would need to borrow $76bn less than expected at $776bn in privately held net marketable debt.
- Then on Wednesday, they adjusted the way this cash would be raised by increasing the proportion of T-bills issued relative to coupon bonds. This adjustment meant that the number of coupon bonds being issued was far lower than market expectations despite being the highest value on record.
- And finally, the US jobs data came out weaker than expected at 150k new jobs added versus expectations of 180k. While this was partly driven by the UAW auto strikes, which lowered the number of jobs within the manufacturing sector by at least 30k, average hourly earnings also came in lower than expected at 0.2% MoM.
The combination of these three events reversed the dynamic of recent weeks where higher yields lead to a stronger USD and weaker equities – particularly small caps, banks, and housing stocks (Chart 4).
BoE paused as expected. On Thursday, the BoE kept its base rate unchanged at 5.25%, with fewer voters backing a hike than in August. Despite this, its Monetary Policy Report (MPR) read hawkishly as they attempted to push back on the market pricing in near-term rate cuts. Data quality issues around the labour market seem to be concerning the BoE and clouding its reading of any loosening. We expect services inflation (ex. rents) will continue to re-anchor and the BoE’s fears of sticky inflation will prove unfounded. The near-term risk is that October tends to see rental re-pricings, which could send it another leg higher.
What to Watch
It is a relatively data light week this week. On markets, we will watch to see if the rally in the US 10Y is sustained and how it impacts other assets.
In oil markets, we think we are going from ‘buy the dip’ to a ‘sell the rip’ market. Should Brent head back up to $90, we think this offers great risk-reward on the short side.
In equities, regional banks and small caps will be key to watch. Meanwhile, mortgage REITs could offer reasonable value on the long side in addition to homebuilders.
Will ECB speakers add to hawkishness? The ECB’s last policy announcement was pretty uninspired. We noted then that we could see strong hawkish pushback on the idea that early PEPP winddown discussions had not happened. This week could be the time for it. The hawks will probably want to double down on Schnabel’s recent speech: that there are big risks to the disinflation path, and that the market should be careful taking too much from the fall in the YoY rate on energy/commodities.
Can credit growth hold up in China? While there are no MPC meetings in Asia, we are watching China’s aggregate financing data, and trade data for China and Taiwan. Seasonality will affect China’s aggregate financing data as it covers the period of one weeklong national holiday. We do not forecast this number but incorporate it into our tracking of credit impulse. China and Taiwan will release trade data. We expect improvement here on favourable base effects, but we will also be watching the semiconductor export numbers from Taiwan.
Sticking with EM… We see a relatively uneventful MPC meeting for Banxico on 9 November as the outlook has not changed since the last meeting and market expectations are for a hold as well. We believe it is appropriate for policy to stay unchanged until Q2 given risks to inflation are still biased to the upside amid a robust economy that is firing on all cylinders.
The Week Ahead: Watch Dominique and Andrew break down market events from the past week, including the Fed’s decision to hold rates and the latest NFP print. Given the latest data, Dominque explains why investors should not carried away betting on lower rates ahead.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
Viresh Kanabar is an investment strategist with 8+ years of experience, notably contributing to portfolio construction and risk management at CCLA Investment Management, a £12 billion fund. Viresh was also a voting member of the Investment Committee and ran the private asset valuation process. Before his role at CCLA, Viresh made significant contributions during his three-year tenure as a Consultant at Deloitte, where he was a part of the largest P&C merger in 2016.