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The rally in US bonds continued at full speed yesterday and bonds are set to record their best month since the GFC this November. The US 2-year yield tumbled to almost 4.60% yesterday from nearly 5% at the start of the week. While the 10-year yield rebounded after hitting 4.25%. That makes an almost 40bp fall for the US 2-year yield and a 25bp fall for the US 10-year yield in three days only.  

A faster fall in short-term yields means that that the market is busy pricing rate cuts (which we know it does), yet the amplitude of the move is relatively big.  

Released yesterday, the US Q3 GDP was revised to an eye-popping 5.2% from an already high 4.9% printed earlier. The consumer spending component was revised slightly lower, and the price pressures seemed softer than previously announced. But we could easily say that the US economy’s Q3 performance made China jealous!  

If you dig deeper: even though yesterday’s above-5% GDP print would’ve been an excellent trigger for a rebound in the US bond yields and the dollar – on belief that the US economy is strong enough to allow the Federal Reserve (Fed) to keep rates ‘high for long’ - it also surfaced the worries (or hope) that this incredible performance can’t last!  

And guess what? The Atlanta Fed’s GDP Now forecast – which beautifully predicted last month’s above-average performance – is now pointing at a sharp decline in the US GDP growth in the current quarter to around 2%. Note that a 2% growth in the US is still above average and shouldn’t be enough to convince the Fed to start cutting the rates too early if the slowdown in inflation remains insufficient. But if inflation slows, nothing will stop the bond traders from continuing to rush in.  

Today, all eyes on the US PCE index – the Fed’s favourite gauge of inflation. The headline PCE may have eased from 3.4% to 3.0% in October, and core PCE is seen down from 3.7% to 3.5%. A softer-than-expected figure could further fuel expectations of an early Fed cut, while a stronger-than-expected set of figures should, in theory, calm down the dovish enthusiasm and call for a rebound in the yields. Presently, activity on Fed funds futures gives almost 80% chance for a Fed rate cut in May, and the probability of a March cut is 50-50. 

EUR/USD retreats despite soft Dollar

The rally in US bond markets, and the tumbling US yields weigh on the US dollar. The USDJPY extended its drop, and finds sellers above the 100-DMA, whereas the EURUSD couldn’t extend gains above the 1.10 mark as inflation data from some Eurozone countries came sufficiently soft yesterday. Spanish inflation fell more than expected to 3.2%, as German inflation fell more than expected to 2.3% in November. The Eurozone’s aggregate inflation will be released after the French and Italian figures this morning, and slowing inflation will certainly give cold feet to the euro bulls above the 1.10 level – even though it’s not impossible to see the pair surpass this level due to USD weakness. 

Crude Oil rebounds before OPEC decision 

OPEC is expected to announce an eagerly expected decision regarding its supply strategy today. The barrel of US crude is back to $78pb, and ready to jump above the 200-DMA if Saudi Arabia obtains a joint effort from other members in reducing supply. 

Of course, OPEC will do its best to get the oil bulls on its side when it announced its decision today. But when expectations are high, they are harder to satisfy. Therefore, if a post-decision rally fails to send the price of a barrel above the $81pb level, the critical 38.2% Fibonacci support on September to November selloff that should distinguish between the actual bearish trend and bullish consolidation, it could be a better idea to sell the tops. 

COP28

70’000 people flew to Dubai this week to talk about how to cut carbon emissions. 70’000 people. Staying where they were would certainly be a first step in gaining credibility on how to cut emissions. And that’s not all the absurd in this COP summit. The CEO of the Abu Dhabi National Oil Company will be leading this week’s summit. Yes, the CEO of a company that can survive only by keeping carbon emissions where they are. Additionally, the fossil fuel industry has been invited to participate more than any other COP since the gatherings began in 1995. You know, nothing says ‘let's save the planet’ like a summit led by a big oil CEO. 

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This report has been prepared by Swissquote Bank Ltd and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Swissquote Bank Ltd personnel at any given time. Swissquote Bank Ltd is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.

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