Treasuries Surprising Comeback: In the intricate dance of global markets, the spotlight falls on an unexpected protagonist: U.S. Treasuries. Their recent surge in performance has drawn attention and stirred speculation, signaling what some are calling a comeback for the ages. As the dust settles from recent market tumult, it’s worth examining the factors at play and understanding the broader implications for investors worldwide.
Just a short while ago, ominous headlines painted a picture of a collapsing market, with some even suggesting that the very fabric of civilization was under threat. Fast forward to the present, and 10-year Treasury notes are on track to celebrate their most remarkable month since the 2008 global financial crisis. Yields have seen a notable decline, down 61 basis points for November, with two-year paper witnessing a rapid 31 bps drop just this week – the most significant dip since the U.S. mini-banking crisis in March.
The catalyst for this unexpected twist in the narrative comes from the Federal Reserve, with encouraging hints and signals from key figures. Notably, Governor Waller’s surprising shift to a more dovish stance has set off a chain reaction in the markets. The mere mention that policy might need adjustment if inflation continues to fall has led to reassessments and recalibrations across the financial landscape.
As speculation grows, traders are closely eyeing Fed Chair Powell’s upcoming Q&A appearance. The anticipation is that Powell may echo the sentiments expressed by Waller, potentially accommodating the market’s wishes for a rate cut. This anticipation has manifested in futures fully pricing in a quarter-point cut in May, with even odds for March. The total easing expected for 2024, as reflected in Fed fund futures, has surged to 115 bps.
While this “fireside chat” looms large in the market’s imagination, investors are also bracing for the U.S. personal consumption expenditures (PCE) report. The hope is that it will align with the benign Consumer Price Index (CPI) data, showcasing a slowdown in core inflation to 3.5% for October. Any deviation from this expectation could add more twists to an already captivating plot.
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Across the Atlantic, the European Union awaits its own inflation data, with analysts leaning toward a potential downside surprise. Subdued readings from Germany and Spain have set the stage for the EU’s Harmonized Index of Consumer Prices (HICP) to slow to 2.7%, marking the lowest level since mid-2021. This anticipation has led futures to price in the likelihood of an ECB rate cut as early as April.
Amidst this market drama, the dollar finds itself in a precarious position. The Dollar Index is on track for its most significant monthly loss since November last year, down 3.7%. Against the yen, the dollar has fallen 3.1% – a potential record for the year. The euro, too, is gaining ground, showing a 3.8% increase for the month.
The Chinese yuan has not been immune to these currency fluctuations, with the dollar experiencing a noteworthy 2.6% decline against the tightly managed currency. Notably, a lackluster China PMI survey failed to provide the dollar with the anticipated lift.
As the market navigates through these twists and turns, Thursday holds key events on the horizon. Speeches by ECB members Lagarde, Enria, McCaul, and Jochnick, along with appearances by BoE Monetary Policy Committee member Greene and Riksbank Deputy Governor Bunge, are sure to add more layers to the evolving narrative. Additionally, a barrage of economic data, including EU HICP flash inflation, German retail sales and unemployment figures, French CPI, PPI, and consumer spending, will contribute to the unfolding saga.
In the midst of this market theater, the question remains: Will the drama persist, or is a plot twist imminent? Investors brace for the unknown as they navigate the complex and ever-shifting dynamics of global markets.