New York saw UST yields take another leg higher on Wednesday as the market struggled with supply and a continued rally in equities. amid continued CTA selling/AM liquidations. The Front-end was hit after the Fed’s Logan noted “meaningful” risk that inflation gets stuck above 2% and added future rate cuts would be ‘more gradual’. FedSpeak is proving an emotional roller coaster.
USTs were at session lows heading into the $39bn 10yr reopening. Even so the auction tailed another 0.4bps, stopping at 4.066%.
The Sept FOMC minutes were considered old news in light of recent data, so had minimal market impact. The minutes stated that a "substantial majority" backed a 50bp cut, though "some" officials would have preferred 25bps. On inflation: it mentions ""developments in the second and third quarters of 2024 suggested that the stronger-than-anticipated inflation readings in the first quarter had been only a temporary interruption of progress toward 2 percent." It was noted that the labour market "remained solid".
The median fed dot in September for year-end 2024 was 4.38%, pointing to a baseline of two more 25bp cuts this year.
In Europe, ECB's Kazimir: "Can't rule out" a rate cut at October meeting, but "not as convinced as media reports" on an October cut. Unlike the Fed, which has a dual mandate of maximum employment and price stability, the ECB only has one objective, price stability.
China’s August activity data confirmed the soft domestic demand picture. Retail sales and fixed asset investment growth slowed, despite a striking surge in government-bond issuance to raise funds for infrastructure investment. But over Golden week there was an increase in air travel and international trips, suggesting that higher-income travellers could be starting to feel more confident about spending.
A word on inflation; If China’s is committed to reversing the economic malaise with strong and coordinated monetary and fiscal moves, the global economy should experience a decline in exported disinflation. A more aggressive policy response in China could result in higher rates and term premia globally.
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