The market focus will be on the BLS benchmark revision of the US Payrolls’ statistics

KBC Market Research Desk KBC Bank

Markets

Markets started slow but after all constructive to the new trading week, with bonds and equities closing in green. Upcoming event risk (French confidence vote a.o.) for now didn’t spoil the game. US interest rate markets facilitated a further easing of global financing conditions, with today’s BLS benchmark revision for the US payrolls a potential catalyst for more aggressive Fed easing. The US yield curve in a nice bull flattening move eased between 2.3 bps (2-y) and 6.7 bps (30-y). Fiscal worries/risk premia have subsided a bit, at least for now. EMU/German yields followed this trend, albeit at a distance as the ECB has ended its easing cycle. Bund yields declined between 0.3 bps (2-y) and 3.3 bps (30-y). The French-German 10-y spread was unchanged (77 bps), slightly off last week’s peak levels. After the close of European markets, French PM Bayrou as expected lost the confidence vote in Parliament over his budget plans, highlighting the political stalemate. However, for now, markets apparently feel no need to push French risk premia even wider as long as president Macron doesn’t call new snap elections. Short-term, Friday’s rating review by Fitch (AA- with negative outlook) still might cause some additional jitters. The global easing of financing conditions also supported equites (Nasdaq +0.45%, EuroStoxx 50 +0.84%). On FX markets, the dollar on Friday only lost modest ground in the wake of much weaker than expected payrolls. Still, losses were extended in yesterday’s ‘risk-on’ context. DXY (Close 97.45) is at risk of slipping below the July/August lows near 97.55. Dollar weakness also dominated in the EUR/USD cross rate, with the pair drifting higher in the 1.17 big figure (close 1.1763).

Today’s eco calendar is thin. European markets will keep an eye on how French president Macron manages the political crisis. In the US, NFIB small business confidence is interesting when assessing the broader picture on the US economy, but no market mover. The market focus will be on the BLS benchmark revision of the US payrolls’ statistics. Consensus sees a potential downward revision of US payrolls in the year up to March 2025 by 700K. Whatever the number, the report probably will indicate a much weaker starting point as the Fed is embarking for a next phase in its policy normalization process. This might cause the central bank to add further weight to labour market conditions and raise expectations on accelerated easing. The US 2-y yield has downward potential towards a neutral 3% and also trigger further USD weakness. EUR/USD 1.1789 is final intermediate resistance ahead of the YTD top at 1.1829. Later today, the US Treasury starts its mid-month refinancing operation with a $58bn 3-y Note sale.

News and views

Inflation expectations ticked up 0.1 ppt to 3.2% at the one-year-ahead horizon, the New York Fed August survey revealed yesterday. The gauge hasn’t been below 3% this year so far and the closest it got to the Fed’s 2% target since the start of 2024 was in October (2.9%). The 3-yr and 5-yr horizon expectations were unchanged at 3% and 2.9% respectively. Job market sentiment showed further cracks with the perceived probability of finding a job fell 5.8 ppt to a series low (since June 2013) of 44.9%. Consumers also find it more likely that the unemployment rate will rise one year from now (+1.7ppt to 39.1%) and that they’ll lose their jobs (+0.1 ppt to 14.5%). Income expectations remain unchanged for a second month straight (2.9%) while those for spending growth rose marginally to 5%.

Data from the US Treasury Department showed that India has been steadily reducing its purchases of US bonds. Investment in June dropped to $227.4bn from $235.3bn in May and around $242bn a year ago. India’s central bank (RBI) has also increased the amount of gold reserves, other data revealed. The country’s finance minister said last week the RBI was taking a “very considered decision” to diversify its reserves, which are the world’s fourth-largest. The moves are seen as geopolitically inspired and happen against the backdrop of a trade dispute with the US. The latter in August imposed a 50% levy on Indian exports, with half of that being a penalty for buying Russian oil.

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KBC Market Research Desk

KBC Bank

KBC's Market Research Desk publishes a number of short-term reports.

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