Risk-off sentiment boosts core bonds – Bailey opens door to BoE rate cut

Markets

Core bonds gained ground in yesterday’s risk-off trading session with US Treasuries significantly outperforming German Bunds. The former erased outsized losses suffered on Wednesday. US yields fell by 5.8 bps to 8.3 bps on a daily basis with the belly of the curve outperforming the wings. Changes on the German yield curve range between 1.7 bps and 2.3 bps. On both occasions, limited available US eco data were at least partly responsible for the move. First following better ADP employment data and a firm services ISM, next after a significant surge in… October Challenger job cuts. A data point which normally doesn’t make the shortlist of market-movers. US companies announced 153k job cuts in October, driven by technology and warehousing sectors. Year-to-date job cuts have exceeded 1 million, the most since the pandemic. In the same period, US-based employers have announced the fewest hiring plans since 2011. Markets are starving for more official numbers as the US government this week passed the previous record for longest shutdown. The US Senate is expected to vote again today on a new package to end the deadlock but it’s far from certain that it already satisfies Democratic demands. According to the WSJ, the package combines a short-term spending measures with three full-year funding bills (legislative branch, agriculture and military construction & veteran affaires). It would reopen the government through mid-December or January. Today’s eco calendar would have centred around October payrolls if it weren’t for the shutdown. Now we’ll have to do with November University of Michigan consumer confidence. It sets the stage for more sentiment-driven trading. Risk sentiment is vulnerable to a more pronounced correction lower. We look out whether the (trade-weighted) dollar makes a new attempt to break key resistance at 100.26 (August high & 200d moving average) in such circumstances.

The Bank of England left its policy rate unchanged yesterday at 4% in a 5-4 split vote. BoE governor Bailey who casted the tie-breaking vote, opened up for a rate cut as soon as December. Asked about his motives, he said that the (lower) September CPI was just one datapoint of the disinflation process being back on track. He also thinks that inflation peaked in September, implying that he’ll get the disinflation evidence he is looking for by December. Contrary to August when the onus was still on inflation, Bailey now thinks that risks (upside inflation vs downside growth/labour market) are now more in balance. It sets the stage for a Fed-like risk management exercise. The BoE-governor felt comfortable with the market implied rate path, landing the policy rate around 3.5%. On several occasions, he stressed that there was broad agreement – doves and hawks - that as the policy rate approached neutral, the contribution of monetary policy to underlying disinflation would become harder to discern, making the case for further policy easing more finely balanced. Sterling and broader UK markets weren’t really impacted by the BoE’s dovish hold with EUR/GBP still hovering near 0.88. 

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Chinese October foreign trade data were substantially weaker than expected, both regarding exports and imports. Exports (in dollar terms) declined 1.1% Y/Y compared to still a 8.3% Y/Y gain in September. At the same time, import growth also slowed markedly from 7.4% Y/Y to 1 Y/Y. The trade surplus eased slightly to $90.07bn (from $90.45bn) while a modest further rise was expected. Both technical factors (high base effect from last year) and underlying momentum impacted the numbers. Exports to the US declined 25.2 % Y/Y. Exports to the EU grew a modest 0.9% down from +14.2% in September. Exports to ASEAN economies still rose 11.1% Y/Y, but that pace also slowed compared to September (15.8%). The data suggest that exports (mainly to economies outside the US) is receding as a driver to keep up economic growth. At the same time, the slow rise in imports hints at mediocre domestic demand. In its new five-year plan following the Central Committee’s Communist Party meeting, the government reinforced the case for private consumption to have a bigger role to support overall economic growth goring forward.

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