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Treasury Bill jawboning triggers tumble

Global interest rate benchmarks and the US dollar are sharply lower after a remarkably-turbulent short-covering rally saw the ten-year Treasury yield fall from above 5 percent to 4.84 percent during yesterday’s session. We hesitate to ascribe price action to investors talking their books, but the move appeared to kick off when Pershing Square’s Bill Ackman said he’d unwound his bet against US government bonds, and gained steam on comments from “bond king” Bill Gross, who wrote that he had begun buying short-dated interest-rate futures to harness an expected downturn by year end.

Equity futures are setting up for a stronger open, oil is up, and most major currency blocs are seeing inflows as rate differentials narrow. The Swiss franc, which had been gaining on safe-haven demand, is retreating, and the Canadian dollar is holding steady as traders brace for a less-hawkish pause at tomorrow’s Bank of Canada decision.

We’re not sure how sustainable this is in the short term: Markets have at least $120 billion in Treasury supply and another $20 billion in corporate debt to absorb this week, meaning that yields could come under upward pressure once more. But survey data – beginning with today’s update from the Institute for Supply Management – could help set the stage for our long-awaited reversal in US economic momentum, leading to a downgrade in overly-ebullient growth forecasts for the fourth quarter and beyond, providing an enticement to investors buying bonds at current levels.

The euro is coming under sustained selling pressure after survey data pointed to a deeper-than-anticipated fourth-quarter economic downturn. The common currency area composite purchasing manager index fell from an already-contractionary 47.2 to 46.5 in October, with both services and manufacturing sub-indices moving further into negative territory. Hiring came to a standstill as optimism about future conditions waned. An earlier lending survey provided the smoking gun: the European Central Bank said “Demand for loans to large firms decreased almost as much as the all-time low reached during the global financial crisis,” during the third quarter, with “Higher risk perceptions related to the economic outlook and borrower-specific situations, lower risk tolerance and lower liquidity positions of banks” contributing to the tightening.

The pound is relatively unmoved after a second tranche of labour market data pointed to an easing in conditions. According to delayed numbers from the Office for National Statistics, unemployment rose 0.2 percent to 4.2 percent in the three months ended August, and the number of job vacancies shrank by 43,000.


Still Ahead

WEDNESDAY

The Bank of Canada is widely expected to leave policy settings unchanged, but shifts in the message conveyed within the accompanying statement, Monetary Policy Report, and press conference could trigger a reaction in rates markets. Officials are unlikely to abandon their hawkish bias – inflation rates remain well above the Bank’s target range, labour markets remain strong, and Governor Macklem has already suggested that the economy is not headed for a “serious recession” – but there is little doubt momentum is turning negative. Near-term price forecasts could bump higher on a rise in energy costs, but the longer-term outlook could see downgrades that bring earlier rate cuts into view for market participants. (10:00 EDT)

THURSDAY

The European Central Bank will almost certainly stand pat this week as rapidly-evolving economic conditions put policymakers in a difficult bind. War in the Middle East has ratcheted geopolitical risks higher even as it has raised inflation-critical oil prices, and an early-autumn spike in global bond yields has enhanced monetary policy transmission while threatening to upset a delicate balance between sovereign issuers within the euro area. Higher inflation projections could push policymakers into a final hike at the December meeting, but we suspect slowing growth and widening spreads will keep the Bank on hold through mid-2024, keeping rate differentials tilted against the euro. (08:15 EDT)

The US economy may have grown more than 4 percent on an annualised basis in the third quarter on strong consumer spending, rising inventories, and an improvement in net exports. Consensus forecasts are pointing to an above-4.5 percent print, and the Atlanta Fed’s “nowcasting” tool is currently estimating growth at 5.4 percent – a pace which, if realized, would be five times faster than economists had anticipated when the quarter began. Few expect this pace to hold up. (08:30 EDT)

Aircraft purchases will likely boost the headline durable goods print for September, but with transport excluded, orders likely fell from August’s 0.4-percent pace as businesses and consumers turned more cautious. Economists are forecasting an above-2.5 percent jump in overall orders, but expectations are much lower for “core” orders, which are seen rising just 0.3 percent. (08:30 EDT)

Canada’s equivalent to the US non-farm payrolls report should show labour market conditions remaining relatively tight in August, even as signs of softness began to emerge. More recent data showed the unemployment rate rising in conjunction with a solid increase in the number of new jobs in September (08:30 EDT)

FRIDAY

The Federal Reserve’s preferred inflation indicator is thought to have accelerated slightly in August, with consumer outlays rising at a strong clip on higher gasoline prices and continued wage growth. Consensus forecasts – and Jerome Powell’s comments last week – suggest the core personal consumption expenditures index rose 0.3 percent month-over-month, speeding up from 0.1 percent in August, and climbing 3.7 percent year-over-year. Based on estimates derived from earlier data releases – including retail sales and the non-farm payrolls report – personal spending likely increased at least 0.5 percent, and incomes might have risen 0.4 percent. (08:30 EDT)

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