China plans to reduce quarantine time

Markets

We have become more accustomed to the large swings in bond yields over the past few months. But it always seems extraordinary when they appear out of nowhere. That’s what happened yesterday in a trading session that didn’t have much to offer in terms of important economic data or other events. Yet core bond yields have reached new cycle (closing) highs at almost all time frames. US bond yields climbed between 9.5 basis points and 13.6 basis points in a flattening, even with upcoming housing data mixed – at best. Fed Kashkari Comments (“no evidence that core inflation has peaked”, “more serious risk from insufficient tightening”) and Evans helped support the move to the United States. Bullard said frontloading could end this year before moving to sufficiently restrictive policy with small adjustments as inflation cools in 2023. German yields rose 11.8 to 12.3 basis points on the 2-5 year segment, again underperforming swaps. Gilt returns were the exception even as Britain’s CPI is back in the double-digit zone (10.1%). The ultra-long end fell more than 30 basis points, bringing the 30-year back below 4% for the first time since late September. This is still a direct consequence of the fact that the Bank of England has excluded (for now) this part of the curve in its bond sales program from November 1st. WE. The US dollar has dominated the currency markets with everyone watching USD/JPY as it approached the 150 barrier (triggering an intervention?!). EUR/USD declined from 0.986 to 0.9777. The British pound traded without a clear direction. EUR/GBP closed unchanged above 0.87.

Sentiment in Asian equities was gloomy but was slightly boosted by reports that China plans to reduce quarantine time. The country’s very strict Covid rules are weighing on demand and continue to hamper supply chains. The news is seen as a first step in the other direction. Chinese stocks have erased losses to turn slightly positive and are also leading their peers away from intraday lows. The dollar pared its gains. Core bonds are trading around or even slightly below yesterday’s closing levels. The BoJ stepped in this morning with an unanticipated bond buying spree (see below). Given the empty economic calendar and upcoming events (ECB next week), we would normally argue for wait-and-see trading behavior. However, yesterday showed that this need not be the case per se. Especially with many parts of the yield curve, both in the US and Europe, having moved past the highs of the previous cycle (close), there is still room for more from a technical standpoint. In the forex markets, all the attention is on the USD/JPY. 149.95 and above.

News headlines

Unexpectedly, job growth in Australia almost came to a halt in September, with a rise of only 900, compared to market expectations for a gain of around 25,000. Full-time employment was up slightly (13.3k). Part-time employment has declined. The participation rate stabilized at 66.6%. At the same time, the unemployment rate remained very low at 3.5%. The labor market is gradually moving towards a more balanced state supports the case for keeping the RBA at a slower pace of rate hikes. At the October 4 meeting, the RBA hiked its key rate by “just” 25 basis points to 2.6%, as markets expected a bigger hike. For the next RBA meeting on Nov. 1, the market expects a similar step of 25 basis points. Despite weaker than expected labor market data, Australian bond yields rise around 13 basis points across the curve this morning on the repositioning of the global market. AUD/USD has fallen to currently trade in the 0.6245 area, with a cycle low set earlier this month at 0.617.

The Bank of Japan announced this morning an unscheduled bond buying operation as the broader rise in global yields pushed the 10-year Japanese government bond yield above the 0.25% cap. To avoid a further rise, the BOJ announced the purchase of a unlimited amount 10-year notes at a yield of 0.25%. The BoJ also intends to buy 250 billion yen of bonds starting with a 5-year maturity. Today’s trade shows that the BoJ continues to resist the global trend of normalizing yields, which is also reflected in persistent weakness of the Japanese currency. This weakening in September also resulted in a 44.9% year-on-year rise in the import bill. However, the value of exports also rose 28.2% to a record high of 8.8 trillion yen, slightly easing the adjusted trade deficit to 2.01 trillion yen.

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