Cailianshe October 28 (Editor Xiaoxiang) is known as the "anchor of global asset pricing ", the benchmark 10-year US bond yield fell below the 4% mark on Thursday (October 27). Behind this trend, it still reflects the market's speculation that the Federal Reserve this round of tightening cycle may be about to slow down the pace of interest rate hikes. What is quite interesting is that from the news perspective, the two major risk events in the global financial market on Thursday - the initial value data of the GDP in the third quarter and the European Central Bank's October interest rate resolution both released deep signals that are inconsistent with the outermost appearance.
At first glance, the overnight stronger-than-expected US GDP data and the European Central Bank's decision to raise interest rates by 75 basis points should be beneficial to the rise in US Treasury yields. However, after some in-depth exploration, market participants obviously did not think so, and still adopted the strategy of buying US bonds on dips: the yield on
benchmark 10-year US bonds fell below the 4% threshold on Thursday, falling 9.1 basis points to 3.92% throughout the day.
All other terms of yields also fell: the 2-year US Treasury yield fell 14.8 basis points to 4.27%, the 3-year US Treasury yield fell 14.2 basis points to 4.242%, the 5-year US Treasury yield fell 13.4 basis points to 4.058%, and the 30-year US Treasury yield fell 5.7 basis points to 4.086%.
In terms of interest rate market pricing, traders' forecast for the peak of interest rate in the Fed's interest rate hike cycle in this round of interest rate peak quickly fell from 5.03% last Friday to an overnight low of 4.78%...
The reasons for the above changes in the US bonds and interest rate markets overnight are actually only two points:
In the United States, the performance of the US GDP data in the third quarter was actually not that good, which is not enough to reverse the concerns of industry insiders about the economic outlook, nor does it support the continued sharp interest rate hike of the Fed;
Overseas, the European Central Bank's sharp interest rate hike is actually not hawkish, and it even reveals more signals that are dovish. This shows the world that the central banks around the world may have become increasingly weak in the tightening path as the economy is facing recession pressure.
U.S. third-quarter GDP data: gold and jade, and shattered?
Judging from the main indicators of US GDP, the third-quarter economic "report card" handed over by the US Department of Commerce on Thursday does not seem to be anything wrong: the initial value of the US real GDP annualized quarterly rate in the third quarter recorded 2.6%, which was quite surprisingly exceeded the expected 2.4%, not only setting a new high since the fourth quarter of 2021, but also the first time that the US GDP data has recorded positive growth this year.
It’s no wonder that US President Biden and US Treasury Secretary Yellen both gave “likes” almost the first time after the data was released. Biden said that the third-quarter GDP data showed that the economy was continuing to move forward and did not fall into recession.
Yellen also pointed out, "This data clearly shows that the US economic growth is stable. We have seen the US economy change from very rapid growth to current sustainable growth, and the economy has realized its potential."
However, industry insiders are more skeptical about this seemingly excellent GDP data. Some economists said that the recovery of US economic growth in the third quarter blurred some signs of the momentum indicator 's continued slowdown. Although inflation-adjusted GDP in the third quarter is roughly the same as at the end of 2021, the economy may soon start to worsen again from some of the ominous signs implied in the report.
These phenomena include:
, as an engine of economic growth, consumption expenditure increased by only 1.4% compared with the previous quarter, and the performance in the first three quarters of this year was the worst since demand collapsed in early 2020;
As mortgage interest rates rose to a high of more than 20 years, residential investment fell sharply at a rate of about 26% year-on-year. In the words of Citigroup economist Nathan Sheets, this is a devilish decline.
Excluding trade and inventory, the final sales to domestic buyers increased by only 0.5% annually, while the average level in the five years before the outbreak was close to 2.6%.Sal Guatieri, senior economist at
BMO Capital Markets, said when referring to the final demand indicator that it is very rare for this indicator to basically stagnate during non-recession periods, which reflects something that means the U.S. economy is losing momentum.
Chief North American economist Paul Ashworth of Capital Investment Macro also pointed out that the rebound of the 2.6% annualized quarterly rate of the U.S. GDP in the third quarter looks impressive, but this is entirely due to a net foreign trade growth of 2.7%. Overall, although GDP reversed its first half of the year in the third quarter, this strong momentum is not expected to continue. "Exports will soon fade, and domestic demand will be squeezed under the heavy pressure of interest rate hikes. We expect the economy to enter a moderate recession in the first half of next year."
In the GDP data, there is a relatively optimistic signal that the decline in inflation is the decline. An inflation indicator in GDP, the Personal Consumption Expenditure Price Index (PCE), grew by 4.2% in the third quarter, the lowest growth rate since the end of 2020. However, this is actually a point that is more unfavorable to the trend of US Treasury yields, as it further proves the speculation that the Fed may slow down its rate hike. PCE data for the September single month will be released tonight.
European Central Bank interest rate resolution: 75 basis points rate hike is still a "double rate hike"!
The ECB raised interest rates for the second consecutive 75 basis points on Thursday, doubling key deposit rates to 1.5%, reaching its highest level in more than a decade. However, even so, in the eyes of market participants, the ECB interest rate hike last night was still an absolute "double rate hike".
This can actually be seen from the overnight trend of euro and European bonds. Euro fell 1.1% overnight, falling below the 1-to-1 parity mark again. Eurozone Treasury bonds rose across the board, with the 10-year German Treasury yield falling below the 2% mark for the first time in three weeks.
Although the ECB is expected to raise interest further, a key signal in the statement has attracted more attention: the ECB removed the wording “at the next few meetings” and said it has made "substantial progress" in withdrawing stimulus policies.
This has caused the money market to cut bets on the ECB's interest rate hikes. Market pricing after the interest rate meeting showed that the ECB's benchmark rate will only peak at 2.65% next year, while the peak rate pricing was close to 3% before the policy decision was released.
In another issue that is more concerned by the market - balance sheet reduction , the ECB Lagarde said on the same day that the ECB deliberately did not discuss quantitative tightening (QT) at this meeting, and the bank will decide in December to reduce the key principles of asset purchases. This also disappoints some traders who bet on hawkish things.
Lagarde also pointed out that euro zone economic activity may have slowed significantly in the third quarter. She described a higher possibility of a recession at present.
Brown Brothers Harriman (BBH) global head of foreign exchange strategy said, "Given that a large part of the eurozone has fallen into recession, I feel that the market does not believe that the ECB will raise a big rate, and the outlook for the ECB after December meeting is becoming blurred."
There is no doubt that Lagarde's remarks add more topics to the broader debate whether central banks around the world will succumb to the recession pressures faced by the economy and ease their tightening efforts. Jordan Rochester, foreign exchange strategist at Nomura Holdings, said, "The dovish ECB has won some flexibility in forward guidance today. Now it is no longer just an inflation story. Coupled with the attitude of the Bank of Canada yesterday, it is becoming more and more like a global central bank turn."
Previously, the Bank of Canada raised interest rates by 50 basis points on Wednesday, which was less than industry expectations. Although the market still believes that the Fed's interest rate agenda meeting next week will once again raise 75 basis points, the possibility of narrowing the interest rate hike to 50 basis points in December has become increasingly larger...
This article comes from Cailianshe
