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Yield surge punishes global markets

Tumult in Treasury markets is worsening after the US manufacturing sector showed signs of stabilization and several Federal Reserve officials doubled down on “higher for longer” rhetoric. Ten-year yields topped 4.7 percent in yesterday’s session for the first time since October 2007 – and are holding there – while their inflation-adjusted equivalents are sitting near 2.32 percent

The dollar is steamrolling through currency markets, sitting near a 10-month trade-weighted high as its major counterparts retreat. Equites are – predictably – softer, crude prices are down, and implied volatility measures are pushing upward once again.

Governor Michelle Bowman – one of the most hawkish members of the Fed’s rate-setting committee – warned that multiple rate hikes could prove necessary in bringing price growth down to target, saying “I see a continued risk that high energy prices could reverse some of the progress we have seen on inflation in recent months”. Cleveland’s Loretta Mester – who is not currently a voter – said policymakers would likely raise rates once more this year and hold them at elevated levels “as we accumulate more information on economic developments and assess the effects of the tightening in financial conditions that has already occurred”. She noted the outlook could change if the Chinese economy keeps slowing, the United Auto Workers strike continues, or the government enters a prolonged shutdown, but for now inflation risks are “tilted to the upside”.

Earlier yesterday, a key manufacturing purchasing manager index surprised market participants in rising, suggesting that a sustained decline in the industrial production cycle could be nearing a bottom. The Institute for Supply Management’s index climbed to 49 in September, still below the 50 threshold that separates expansion from contraction, but above the prior month’s 47.6.

The Australian dollar is modestly weaker after the Reserve Bank of Australia met market expectations in leaving its policy settings unchanged. Japan’s yen remains within touching distance of the 150 threshold against the dollar as the “will they, won’t they” game of currency intervention continues. And the Chinese renminbi is essentially flat, with onshore markets closed and offshore volumes thinning.

The dreaded “parity” word is floating across euro trading desks once again as rising energy prices and worsening rate differentials add to the headwinds facing the common currency. The euro is changing hands for less than 1.05 on interbank markets, and the technical outlook looks bearish, with further downside possible in the coming days. We think the stage is set for a modest correction higher in the next few weeks – foreign exchange market momentum is prone to overshooting – but it’s difficult to make the case for long-term appreciation when underlying fundamentals remain so much weaker than their American equivalents.

A relative growth slowdown in the United States looks like the only hope for halting the dollar’s surge on global markets – but market participants might want to be careful about what they wish for. To an important extent, US consumer spending is keeping the global economy aloft – if it falters, we might have bigger problems than an elevated greenback.

Still Ahead


The latest Job Openings and Labor Turnover report is expected to show employment conditions softening further in August, giving the Fed more room to stay on the sidelines. The number of vacant positions is seen creeping up to 9 million in August, implying that there were 1.4 positions available per unemployed worker, down from 1.5 in the prior month. The quits rate – a proxy for overall labour demand – should continue falling. (10:00 EDT)


Services sector activity probably cooled further in September, driving the Institute for Supply Management’s index down to 53.5 from 54.5 in August. Consumer sentiment is weakening as gas prices climb, labour markets slow, and student loan payments resume, but household spending on intangibles has avoided outright contraction thus far. (10:00 EDT)


Initial claims for unemployment benefits should begin rising in coming weeks as the Big Three automakers begin laying off non-union employees, but the increase shouldn’t yet appear in Thursday’s data, which will cover the week ended September 30. Consensus forecasts are pointing to a print close to 210,000, up incrementally from 204,000 in the previous week. (08:30)


The US job creation engine probably slowed further in September, with just 160,000 people added to non-farm payrolls, down from 187,000 in August. The unemployment rate and monthly average hourly earnings growth are seen holding at 3.8 percent and 0.2 percent, respectively. (08:30 EDT)

Data released in synchrony with the US non-farm payrolls report should show conditions worsening in Canada’s labour market, with job growth slowing from August’s surprising 39,900-position gain, and the unemployment rate ratcheting higher up to 5.6 percent from 5.5 in the prior month. (08:30 EDT)

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Twists & turns

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