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US yields keep climbing, squeezing currency markets

A renewed surge in US yields is sucking the air out of global financial markets this morning, putting equities, commodities, and risk-sensitive currencies deep in the red. With yields on ten-year Treasuries flirting with the 5 percent threshold for the first time since before the global financial crisis and rate differentials tilted firmly in the dollar’s favour, the greenback is crushing its major rivals, pushing further into overbought territory.

The Israel-Hamas conflict continues to pose a threat to markets, but safe-haven flows are generally subsiding as the perceived risk of a regional escalation falls. Momentum is fading in gold and the Swiss franc, the yen’s losses are beginning to widen again, and oil prices – under broader pressure as sanctions on Venezuela are eased – are retreating from the highs reached earlier in the month.

The US House of Representatives will likely make another attempt at electing a speaker, but there is little indication of a shift in position among Republicans staunchly opposed to Jim Jordan’s candidacy. With stark divisions in the party on full display, the risk of an acrimonious and prolonged mid-November government shutdown is growing, giving traders another reason to bid Treasury yields higher.

The pound is trading near a five-month low against the euro after data releases over several days pointed to a mildly stagflationary outlook in which price gains fail to offset slowing growth in keeping the Bank of England on hold. Both currencies are down against the dollar as worsening rate differentials interact with weak growth outlooks and growing commodity-price risks.

By our estimates, no fewer than seven Federal Reserve officials will speak in public today, with Jerome Powell’s appearance at the Economic Club of New York likely to have the greatest impact on markets. Amid the cacophony, we think one message will emerge: yields are nearing overly restrictive territory, and downside risks are growing. If we’re right, odds on a rate hike by early next year – currently sitting just below coin-toss levels – could come in a bit, but softer forward guidance is unlikely to fully offset demand and supply imbalances in bond markets in keeping yields elevated for now.

Please note: Our coverage of Powell’s remarks this morning will depend heavily on access to in-air Wi-Fi, and we will be off tomorrow, returning on Monday.


Still Ahead

FRIDAY

The British high street probably saw renewed losses in September, with consumer demand slowing as borrowing costs ratchet up. Consensus forecasts suggest retail sales contracted -0.2 percent month-over-month, down from August’s surprisingly-robust 0.4-percent gain (02:00 EDT)

Statistics Canada’s preliminary forecast for August retail sales showed a -0.3-percent drop, with weaker auto sales likely partially offset by a jump in gasoline prices – suggesting that underlying consumer spending likely moved into contractionary territory. The advance estimate for September will be closely watched, with any sign of softness likely to drive the Canadian dollar lower on the prospect of a deeper spending slowdown. (08:30 EDT)

Japanese consumer inflation might show signs of exhaustion in September, helping pour more cold water on the prospect of a sharp adjustment in the Bank of Japan’s policy settings. The year-over-year rise in headline prices is expected to drop toward 3 percent after hitting 3.2 percent in the prior month, and the core measure – which in Japan excludes fresh food – could slip to 2.7 percent from 3.1 percent in August. Imported costs – emanating from a global rise in energy prices and a domestically-driven decline in the yen – could remain elevated for months yet, but aren’t likely to justify a wholesale repudiation of the central bank’s easy-money policies. (19:30 EDT)

Will the positive vibes last?
Markets Recover As Geopolitical Risk Premia Evaporate
Sentiment swings
Israeli Strike Triggers Short-Lived Volatility Spike
Dollar Juggernaut Slows, But Remains Powerful
Higher for (even) longer