Rates spark: Whimsical data clouds the Fed’s path

Upside surprises in the final US GDP numbers and jobless claims make it difficult for markets to agree on upcoming Fed cuts. A benign PCE reading on Friday won't change that, but payrolls data next week should be more pivotal. Euro rate markets are keen to follow the bearish mood as a stronger dollar reduces disinflationary worries.

US rates are also setting the tone in Euro rates

US rates are in the driving seat as investors try to gauge the Fed's outlook. A set of positive data surprises – an upwardly revised final second-quarter GDP reading as well as benign jobless claims figures – nudged rates higher from the front end. The 2y Treasury rose above 3.65%, the highest since late August, while the 10y US Treasury yield is approaching 4.2% again. With the market already anticipating a benign PCE inflation reading, confirmation should not alter the outlook. The risk is rather for rates to move another notch higher should price dynamics remain hotter.

Looking ahead to next week, the US will likely continue to determine market direction with the official jobs report for September to be released. At this early stage, not many market observers have submitted their estimates, but what we see so far is anywhere from 20k to 80k, thus highlighting the 'lottery' these releases have become.

EUR rates have been dragged higher alongside US rates, led by the belly of the curve. A less aggressive Fed at least lessens the probability of the European Central Bank reacting to FX effects. While it fits our structurally still bearish view, domestically the survey data over the past week pointed in the other direction, if anything. What EUR rates will be looking for in next week’s data is whether the flash CPI leaves the ECB with room to act.

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