A big week for central banks as US yields nudge higher

USD: Week starts with some reversal of Friday’s moves

As has been the case at the start of previous weeks, the de-risking move on Friday has reversed somewhat at the start of the week with investors relieved that there was no broadening of the conflict between Israel and Hamas. Crude oil prices are down between 1%-2% while UST bond yields are slightly higher. The weekend did see an escalation of the intensity of the conflict with a full invasion of Gaza now underway by Israel while there are reports of increased episodes of conflict with Hezbollah on the Lebanon border and Israel attacks on targets in Syria. Developments over the weekend will ensure that the geopolitical risk factor will remain high on the list of factors determining financial market moves in a week of a heavy schedule of macro events – three central bank meetings – the BoJ, the FOMC and the BoE – culminating on Friday with the release of the October US jobs report.

Of the three central bank meetings it is perhaps the BoJ tomorrow that holds the greatest level of uncertainty over the outcome given there has been some recent speculation of another possible change in YCC at this meeting. This was triggered in part by a Nikkei news article last weekend. There was also stronger than expected Tokyo CPI data on Friday and news that Rengo, the major Union umbrella group in Japan, was recommending a wage increase “ of at least 5%” for the upcoming Shunto wage negotiations that will determine wage growth for the year starting in April 2024.

In addition to the central bank meetings and US jobs report, the US Treasury will announce its quarterly refunding plans on Wednesday that could have a notable impact on longer-term yields given the increased sensitivity of bond supply dynamics. There has been a significant bear-steepening of the 2s10s that has seen the degree of inversion shrink from -105bps in late July to -17bps now. Over the same period, the 10-year UST bond / Bund spread has widened from around 135bps to 205bps today. That’s the widest spread since just before the onset of the pandemic in early 2020.

The refunding announcement, the communication from Fed Chair Powell at the FOMC press conference and the US jobs data on Friday will be the three key events for the UST bond market. The inability of the US dollar to strengthen further of late is telling but we still see the window for dollar gains as open until we see clearer evidence in official data of economic weakness – so in that sense, the NFP as always will be key.

NUMBER OF MTHS FROM LAST FOMC HIKE TO RECESSION

Source: Bloomberg, Macrobond & MUFG GMR

GBP: BoE in focus as GBP holds above support

We covered the BoJ and to a less extent the FOMC meetings in the FX Weekly (here) on Friday but the other main central bank event will be the BoE announcement on Thursday. It’s probably the least important of the three central bank meetings from a global markets perspective but the meeting will be important for UK rates and FX. An unchanged monetary policy announcement is highly likely which will be no surprise given the OIS market currently has precisely one basis point priced for Thursday’s meeting.

Given we have in all likelihood reached the peak in the rate tightening cycle, the key now will be communication in terms of assessing the prospects of a pivot toward a more dovish stance over coming meetings. We are likely some distance from that for the BoE but certainly most of the data released since the last meeting in September has pointed to weak economic activity. That may well mean the growth projections in the Monetary Policy Report could show a downgrade from the forecasts in August. The 5-4 split decision in the vote to maintain the policy rate at 5.25% is unlikely to be repeated again this week with a 6-3 or 7-2 vote more likely. Catherine Mann and Jonathan Haskel will probably still vote for a hike. Jon Cunliffe’s term as Deputy Governor has ended and Sarah Breeden will commence her term from 1^st November and will vote for the first time. Breeden in a speech in September and her comments on the weak economic outlook and mixed signals on wage growth risks suggest she is more likely to vote with the majority. The position of Meagan Greene is a little less clear and her vote will determine whether we get a 6-3 or 7-2 vote with the maintenance of her September view perhaps more likely resulting in a 6-3 vote.

The worsening economic data has been clear and will likely be clearly acknowledged by Governor Bailey in the press conference. There have been three consecutive months of declining employment (PAYE jobs data) that will relieve concerns over wage inflation while housing market conditions look to have worsened further. The RICS Price Balance this month hit the worst level since the GFC.

We see this inevitable acknowledgement of weaker data and some evidence that the labour market conditions point to reduced wage inflation risks as helping to push yields lower. The UK OIS curve has more potential to adjust lower further out – just 25bps worth of cuts by September 2024 looks too conservative to us and a less hawkish communication on Thursday could push yields at the back end of next year lower – leading to some further GBP underperformance. For GBP/USD, the October low of 1.2037 will be the key support level.

HOUSING MARKET CONDITIONS HAVE WORSENED SINCE LAST BOE MEETING

Source: Macrobond & Bloomberg

KEY RELEASES AND EVENTS

Country	GMT	Indicator/Event	Period	Consensus	Previous	Mkt Moving
GE	09:00	GDP Q/Q	Q3	-1.0%	-0.6%	!!!
GE	09:00	GDP Y/Y	Q3	-0.7%	-0.2%	!!!
UK	09:30	Mortgage Approvals	Sep	44.5k	45.4k	!!
UK	09:30	Net Lending Sec. on Dwellings	Sep	1.2bn	1.2bn	!
EC	10:00	Consumer Confidence	Oct F		-17.9	!
EC	10:00	Economic Confidence	Oct F	93.0	93.3	!!
GE	13:00	EU-Harmonised CPI MoM	Oct P	0.1%	0.2%	!!!
GE	13:00	EU-Harmonised CPI YoY	Oct P	3.3%	4.3%	!!!
US	14:30	Dallas Fed Manufacturing Activity	Oct	-16.0	-18.1	!

 

Source: Bloomberg