Moves in higher treasury yields grabbed the market’s attention last week as the selloff resulted in 10-year yields rising above its 200-day moving average of nearly 2.33% (2.37% in the overnight market). A number of factors contributed to the move, including:
- The market buzzing that President Trump and Treasury Secretary Mnuchin met with former Federal Reserve governor Kevin Warsh as a potential nominee for the next Fed chairman. Warsh is perceived to be less dovish than that of current FOMC Chairwoman Janet Yellen and may be perceived as friendly to equity markets given his views on deregulation.
- President Trump’s/GOP’s tax proposal, which includes cutting the corporate income-tax rate to 20%.
- The Federal Reserve’s relatively hawkish stance and focus to normalize monetary policy.
- Despite slightly weaker inflation data last week, the market net sold off, in part due to Chairwoman Yellen’s comments that while there may be a downtick in inflation, that it will remain on course and so will the Fed.
- Month-end and quarter-end re-balancing.
Economic data was largely positive last week with second-quarter GDP revised upward to 3.1%, a narrowing in the August trade data and a sharp increase in August inventories which will likely help third quarter GDP. Overseas, strong September German unemployment data gives the ECB more reason to reduce its asset purchases. Eurozone inflation data slightly undershot expectations at 1.5% vs. 1.6%.
Finally, the Bank of Japan kept rates and policy unchanged and remained upbeat on the economic prospects at its policy meeting. The latest member to join the bank’s policy committee, Goushi Kataoka, expressed his dissent on keeping the policy as status quo. Kataoka argued that the central bank should relax policy further in order to achieve its 2% inflation target around the fiscal year beginning in 2019. The next policy meeting is scheduled for the end of October.
Up ahead this week, it’s RISK-ON in global markets despite the Catalan referendum vote to secede from Spain.
A busy economic data week will be sprinkled with important tier-1 releases throughout. Highlights will include August Construction Spending and September ISM Manufacturing (Monday), September ADP and September ISM Non-Manufacturing (Wednesday), August Trade Balance (Thursday) and the September Employment Report (Friday).
Another jam-packed Fedspeak week will include several voting members, including Kaplan (Monday and Friday), Yellen (Wednesday), Powell (Thursday), Harker (Thursday) and Dudley (Friday). This list will be highlighted by Chair Yellen and New York Fed President Dudley. Yellen is expected to deliver welcoming remarks at the community banking event in St. Louis on Wednesday afternoon at 3:15 pm. Dudley will touch on monetary policy and the economy in New York on Friday afternoon.
Overseas major economic data releases include Australian inflation (Monday), Eurozone manufacturing sentiment, Eurozone economic sentiment (Wednesday), Australian trade balance (Thursday), ECB Monetary Policy Accounts report, Japanese leading economic indicators (Friday), Canadian unemployment.
The only major central bank meeting this week comes later tonight with the Reserve Bank of Australia (RBA) rate decision at 11:30 pm EST. Expectations are that the cash rate will be unchanged at 1.50%.
Good luck!
