During the first two weeks of October, the yield on the German 10-year rose by circa 6bp and currently stands at 2.20% while European Investment Grade and High Yield spreads have tightened by circa 8bp.
The moves seen in the European rate and credit markets were driven by the publication of US inflation figures and strong US labour market data, as European inflation data for October came in lower than expected at 1.80% strengthening the European Central Bank’s expectations of a 25bp cut at its October meeting.
The Euro Area Purchasing Manufacturers Index (PMI) continued to paint a gloomy picture for the sector, given the weakening economic scenario in China and its impact on the European economy which is a net exporter to the Asian country.
The German-10 year initially fell following the publication of euro area headline inflation numbers to 2.02% but has since bounced back. Energy prices, which dropped by an annual rate of 6% after falling 3% in August, drove headline inflation lower; however, the ECB expects inflation to rise temporarily at the end of the year as the earlier fall in energy prices is no longer reflected within the Eurostat’s figures.
However, services inflation, which is a key indicator of domestic price pressures, remained elevated at 4%, down marginally from 4.1% in August.
HCOB eurozone PMIs, which are a key indicator of the manufacturing sectors’ health, and which were released on the same day on which headline inflation figures were released, fell to a nine-month low of 45 in September, which further showed the weakness among eurozone manufacturers.
This was evident in the recent cut in guidance from several European automakers which have revised their figures downwards, given both the weakness in demand for battery electric vehicles but also due to the escalation in trade tensions between China and the European Union.
In the US, the release of non-farm payrolls and inflation during the first two weeks of October led to a rise in the US 10-year yield by 12bp to its current 4%, from 3.8% at the end of September. US investment grade and high yield spreads tightened by circa 9bps during the same period.
The US labour market remains tight as the US economy added 254,000 jobs in September, the highest in six months and above expectations of 140,000, which prompted the market to increase bets that the Federal Reserve will lower interest rates at a slower pace after last month’s 50bp cut, and continues to confirm expectations of a so-called soft-landing for the US economy which weathered the worst period of high inflation in a generation, while maintaining robust growth and strong employment.
Further confirming the strength of the US labour market was the unemployment rate which fell to 4.1%. US Treasury yields jumped shortly after the US Non-Farm Payrolls data was published, with the two-year Treasury yield, which is most sensitive to interest rate expectations, rising by 22bp to a one-month high of 3.9%. The inflation figures published late last week show that while headline inflation declined marginally, core inflation rose slightly due to services.
Over the next month, while there are several key events such as third-quarter corporate earnings, central bank meetings and a slew of economic data which may influence fixed income markets one way or another, the focus is now squarely on the US election which is set to be held on November 5. While Vice-President Kamala Harris holds a national lead over her Republican rival, former President Donald Trump, the race could boil down to a few key states, such as Pennsylvania, which could determine the election’s result.
While both candidates’ policies are expected to continue to drive US debt higher, which currently stands at $35.8 trillion with the debt-to-GDP ratio currently standing at 120%, the two candidates’ policies, such as their views on the conflict in the Middle East, the Ukraine war and the possibility of an escalation with China could have a significant effect on markets as we draw closer to election day.
Simon Gauci Borda is a fixed income research analyst at Curmi and Partners Ltd.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.