U.S. Treasury yields across the curve reached levels not seen in several years, last week, on the back of strong U.S. economic data, easing trade tensions in North America and Fed speak. A slew of relatively positive data including manufacturing and employment signaled stronger economic growth, fueling the odds of not only more Fed rate hikes, but the possibility of faster hikes than currently expected. Further, bullish comments by Fed Chairman Powell earlier in the week also prompted the jump in rates (see more below).
The U.S. ten-year Treasury closed the week at 3.227%, last seen in 2011. The treasury climbed about 17 basis points over the week, the largest move since February. Two-year Treasuries wrapped the week at 2.888%, the highest since June 2008. Similarly, the 30-year Treasury moved 20bps on the week, closing the week at 3.396%. Bond markets were closed on October 8th, given the Columbus Day holiday.
Higher bond yields also impacted the markets’ perception of future economic growth and corporate profits, which dragged down equity markets with all the major stock indices closing the week lower. The Dow Jones closed on a high mid-week, but rising rates and concerns regarding the Chinese hacking into U.S. companies caused a selloff. The index closed the week at 26,447.05. The Nasdaq closed on Friday at 3.2% lower, finishing the week at 7,788.45. Similarly, the S&P 500 closed the week at 2,885.57, falling about a percentage point over the week.
Market skittishness will likely extend through the end of the year. Though there are no concrete signs of the U.S. economy slowing down, uncertainty surrounding geopolitical risks (e.g. the Italian budget concerns), the U.S. midterm elections and trade agreements remain. We expect both interest rates and equity volatility to remain elevated in the short to medium term.
I. U.S. Economic Data/Markets
- Unemployment rate hits a near five-decade low
- The unemployment rate fell to 3.7% from 3.9%, the lowest level since December 1969.
- September nonfarm payrolls rose 134k, analysts were largely expecting 180k – the smaller-than-expected rise was partly attributed to Hurricane Florence.
- Wages moved higher, with a year-over-year increase of 2.8%.
- Both August and July payrolls were revised higher.
- Jobs within the manufacturing sector remained solid, alleviating any concerns surrounding the impact of trade disputes on the sector.
- The labor force participation rate remains near historic lows.
- ISM Non-manufacturing rises to the highest reading in ten years
- The September reading came in at 61.6%, 3.1 percentage points higher than the August reading.
- Respondents were upbeat regarding business conditions and the current/outlook for the economy. Conversely, uncertainty surrounding global trade, capacity and logistics were among the cited concerns.
- Fed Chairman Powell’s positive sentiments helped drive risk on sentiments
- Powell noted that there is “no reason to think this cycle can’t continue for quite some time, effectively indefinitely”.
- He believed that the economy is far from neutral and said that the Fed may raise rates past the neutral level, leading some market practitioners to believe that more rate hikes than initially anticipated may be in the works.
- Powell continues to expect inflation will rise and unemployment to fall, acknowledging that wage pressures have not been enough to drive up inflation.
II. Trade Talk
- Given Canada came to an agreement with the U.S. and Mexico regarding a revised NAFTA agreement early last week, some analysts were hopeful for progress to materialize between China and the U.S.
- However, general tensions with China escalated towards the end of last week on the back of potential Chinese hacking of U.S. companies and an Interpol official went missing upon arrival in China.
- White House officials noted earlier in the week that China/U.S. talks may resume in December at the G20 meeting.
- Brexit – speculations regarding negotiations almost reaching a close were reported late in the week.
- The two sides are currently negotiating how to avoid extensive border checks between Northern Ireland and the EU member state Ireland after Brexit.
III. Other
- Italian financial stocks and bonds continue to sell off on the back of economic forecasts and its proposed budget. Italian five-year yields soared as much as 20 bps to about 2.63%.
- The government cut growth forecasts for this year to 1.2% from 1.5%.
- Given the government’s proposed budget, revealed last week, which has a deficit target three times higher than the previous government had considered, has caused investors to remain wary on the back of increasing debt, lower growth projections and higher government spending.
- The EU is meant to opine on the proposal in November.
- The Reserve Bank of India surprised the market by keeping its key rate unchanged at 6.5%.
- The rupee hit an all-time low of 74.2 to the USD on the back of the announcement. It is the worst performing Asian currency this year, falling about 15%. The RBI noted that other emerging market currencies have fared much worse relative to the USD (e.g. the Turkish lira and Argentine peso).
- A rate hike was largely expected to curb a falling rupee on the back of higher inflation and oil prices.
This week: The U.S. markets were closed on Monday due to the Columbus Day holiday. Key data releases are scheduled throughout the week with a number of Fed Officials speaking as well.
Key data/events include:
- German trade balance data (Tuesday)
- CAD housing starts
- FOMC Official Evans speaks
- GBP manufacturing/industrial production (Wednesday)
- August GBP GDP
- FOMC Officials Williams/Bostic speak
- JPY foreign bond/equity investments
- AUD/French inflation data (Thursday)
- ECB Monetary Policy accounts
- U.S. CPI
- CAD New Housing Price Index
- AUD home loans data (Friday)
- CNY trade data
- German CPI data
- EUR industrial production
- U.S. Baker Hughes US Oil Rig Count
- FOMC Officials Evans/Bostic speak
