US 10-year yield

Rates Spark: Energy and food inflation is ringing more alarm bells Suddenly some inflation alarms are ringing again: energy and food prices are under rising pressure, as are market inflation expectations. We'll get US CPI today, which will paint a picture for July. What's beyond that is becoming a little more nuanced and troubling for bonds.   US inflation ahead is key, but so also are the wider impulses which can trouble bonds There is heightened discussion on where we are with inflation. While the US CPI reading is key for the near term, there is also an acknowledgement that inflation expectations coming from the market discount have become a little less anchored than they had been. The 5yr * 5yr inflation rate has returned to the 2.5% area, and the inflation swaps measure of the same has it up in the 2.7% area. These are not awful levels when you consider where inflation was, and at least these expectations are still comfortably below 3%. But it’s the path they’ve been on that creates the issue, as that path has been pointing upwards. At the same time, there is an ongoing rise in food and energy prices in play, which risks adding to headline pressure down the line. Given this backdrop, the US 10yr has managed to remain above 4%, and we think it should continue to do so. And remember, once we get through tomorrow’s US inflation report, we’ll likely see headline US inflation closer to 3.5% than 3% and core US inflation closer to 5% than 4%. There’s been progress made to the downside, but the burning issue for bonds is whether the inflation threat has actually been dealt a death blow. Based on the market expectations for inflation, it hasn’t. For that reason, we stick to our cautious approach to bonds, eyeing higher yields. We also remain under considerable supply pressure this week. Decent US 10yr auction yesterday. Minor tail, virtually none. High indirect bid, and reasonable cover. Not as good as the 3yr. But it did not tail, as some had feared. The 30yr auction is up next.   Market's long term inflation expectations still trended higher     Risk to inflation outlook also sets floor to EUR rates In the eurozone, the upward leg in the longer-term inflation swaps over the past weeks up until the latest correction has been even more striking. Although other measures, such as the European Central Bank surveyed consumer inflation expectations, have displayed further moves in the right direction earlier this week, the recent swings in the price for natural gas also highlight the lingering risk of supply disruptions to the more benign inflation dynamics of late. The ECB may have sounded less determined at the last meeting, not having pre-committed to a hike in September. But one should not underestimate the ECB’s resolve and persistence. Markets are still seeing a 70% chance for one more hike, even if a bit later than September. Further out, though, there is already a full discount of three 25bp cuts over 2024, which suggests not too much room for pricing in more.   Collateral scarcity remains a sensitive topic Bunds moderately cheapened relative to swaps on the back of an ICMA official’s opinion that the ECB would not follow the Bundesbank’s lead in cutting the remuneration of government deposits at the central bank to 0%. That would mean starting in October, only the roughly €50bn sitting at the Bundesbank would be impacted, but not the remaining around €200bn with other national central banks. Until October, the actual impact of the Bundesbank’s changes will remain a source of uncertainty and likely keep Bunds asset swap spreads elevated, but countering collateral scarcity fears are the ECB’s ongoing quantitative tightening, which was accelerated last month and the prospect of higher-than-anticipated issuance from Germany itself. Headlines to that end came from the government which announced yesterday that it was ramping up its climate fund from €30bn to €212bn from 2024 to 2027.      Bundesbank's government deposits are not the largest   Today's events and market view US CPI is key today. Expected are an increase to 3.3% in the headline and only a marginal decrease to 4.7% in the core year-on-year rates. This still means that the Fed’s inflation target is some distance away, although month-on-month readings of 0.2% for both headline and core point to more encouraging dynamics recently. The other release that has seen larger market reactions in the recent past is the initial jobless claims. Especially since the last official jobs data was a mixed bag, a more contemporaneous reading might get more weight to gauge the state of the jobs market. That said, consensus is looking for little change with 230k this week compared to last week’s 227k figure. Fed speakers Bostic and Harker are scheduled to speak on the topic of employment later today. In supply, the US Treasury caps off this week’s supply slate by auctioning US$23bn in a new 30Y bond.

'Significant upside risks to inflation'  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  FOMC minutes released yesterday showed that most Federal Reserve (Fed) officials see 'significant upside risks to inflation that may require more tightening'. Policymakers cited a range of scenarios that included the rising commodity prices that could lead to 'more persistent elevated inflation'. Two of them favoured halting rate hikes, but the minutes showed no official dissenters. The Fed economists also expect a small rise (only) in jobless rate in the US, but they warned that commercial real estate fundamentals could worsen.   The regional banks are under a rising pressure, as a Fitch analyst warned that dozens of US bank credit ratings are at risk – just a week after the rating agency downgraded the US' credit rating, and Moody's downgraded 10 US small and mid-sized banks.   The US 2-year yield remained little changed at around the 5% mark, while the 10-year flirts with the 4.30% level, approaching last October's peak, raising questions among investors on whether levels above 4% are a good entre point in the US 10-year papers, or could it go higher? Looking at the net speculative positions, the rising US treasury yields attract investors. Asset managers' combined treasury positions hit a record in August, but that also means that these positions could be unwound and give way to a deeper selloff. The conclusion is, even though the actual levels look appetizing for US long-dated papers – especially with the Fed's nearing the end of its tightening cycle and trouble brewing in China. risks prevail. Activity on Fed funds futures gives less than 15% chance for a September rate hike in the wake of the latest FOMC minutes. That's slightly higher than around 10% assessed to a 25bp hike before the release of the minutes yesterday. But the pricing for a potential 25bp and even 50bp hike in November meeting are in play.   The US dollar extends gains, and the dollar index is now marching above its 200-DMA, into the overbought market territory, with little reason for investors to step back given the Fed's decided hawkish stance on its rate policy. The S&P500 extended losses below its 50-DMA yesterday and is preparing to test the 4400 support to the downside, while Nasdaq 100 closed below the 15000 level for the first time since end of June. Tesla dropped another 3% yesterday on news that it cut its car prices in China for the second time this year, and the shares closed the session at a spitting distance from the major 38.2% Fibonacci retracement, which should distinguish between the positive trend building since the beginning of this year and a bearish reversal.   Elsewhere, Target jumped nearly 3% yesterday after beating profit expectations when it released Q2 earnings yesterday. Lower costs boosted profit margins, and gross margins jumped 27% last quarter compared to 21.5% printed a quarter earlier, net income more than quadrupled. Shiny results helped investors overcome the 11% drop in online sales – vs. 5% growth nailed by Amazon, and the slashed sales and profit outlook. Again, despite the risk that US consumers may not spend much in the next few quarters, what we see in most data is that... they continue spending – and the resilience of spending starts weighing more on Fed expectations than the risks that don't materialize. 

China rate cuts remain short of expectations, focus on Jackson Hole, BRICS  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The week starts with weak appetite as Chinese banks cut loan rates less than expected; the 1-year LPR was cut by 10bp to a record low versus 15bp cut expected by analysts, while the 5-year LPR was left unchanged despite pressure from Beijing. Chinese banks' decision to keep the 5-year rate steady is confusing for investors, in the middle of a property crisis. The Hang Seng index sank further into bear market, and the global risk sentiment is less than ideal as healthy economic data from the US, and darker clouds over China cast shadow on both stock and bond markets.   The US 10-year yield approached the highest levels since 2007, as the US 30-year yield hit the highest levels advanced towards levels last seen in 2011. The rising yields weigh on major stock indices. The S&P500 closed last week around 2% lower, and Nasdaq 100 lost 2.6% last week. Interestingly, the S&P500 has been down by around 3% since the beginning of this earnings season – while the earnings season was not that bad. Nearly 80% of the companies announced better-than-expected results and Refinitiv highlighted that the Q2 of 2023 had the highest rate of companies beating expectations since Q3 2021, and the earnings expectations rebounded to the highest levels since last October, when the major US indices bottomed out. This picture simply means that the fear of a further Fed tightening, prospects of higher interest rates, combined to the set of bad news from China simply didn't let investors enjoy the better-than-expected earnings.  

Calm before the storm?  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The week started in a relatively good mood. The S&P500 posted its first back-to-back gains this month, even though the US 2-year yield advanced to a fresh high since July with the 2 and 5-year treasury auctions hitting the highest yields since before the 2008 crisis. One would think that the Chinese stimulus measures have lifted up the sentiment across global equities, but the CSI 300 closed yesterday just around 1% higher. In this sense, yesterday was just another day the Chinese stimulus measures didn't get the attention Chinese officials were hoping for. And that's the new normal. Before 2020, any stimulus news from China would move oceans, but now, China can cut rates, inject liquidity, half stamp duty, prevent big names from becoming net sellers... nothing is enough to bring investors back apart from a massive fiscal stimulus. And the chances are that, China won't do that, because Xi doesn't want to explode the national debt levels – which are already alarmingly high – to kick start another unsustainable growth in China. That's not bad in the long run, but it sure costs China a lot of investment. MSCI's EM ex-China ETF has outperformed the MSCI China since the beginning of the year and the trend in Chinese equities, and the latest surveys hint at around 5% growth in 2023, in line with the government's growth target, but not enough to bring money on board.     Focus on US growth & jobs data  The softer US dollar gave some breathing room to other currencies yesterday. The EURUSD bulls won a battle near the 200-DMA, and the pair is slightly above that level this morning, while the USDJPY is steady around 146.50. Crude oil steadied above the $80pb with the news that the tropical storm Idalia could interrupt crude production in the Gulf Coast and put an additional short-term pressure on oil prices. Gold is better bid above the $1900 thanks to a retreat in the US 10-year yield.  Today, the US JOLTS data is expected to post a third month below 10mio job openings. A number lower than expectations would point to loosening jobs market and could soften the hawkish Federal Reserve (Fed) expectations, while a strong figure will keep the economists and the Fed officials in a state of confusion. It is now increasingly certain that the Covid disruption in jobs market has largely passed, which means that the fact that the jobs figures remain resilient to rate hikes is due to another reason! And that reason could be the ageing population. Looking at the CBO projections, the participation rate in the US is not at shocking levels compared to the long-term projections. On the contrary, the actual participation rate (62.6%) is even higher than the long-term projection (62.4%).   Strong jobs figures have potential to boost Fed hawks as tightness of the jobs market means people ask for more money for doing the same job than they would otherwise. 

US yields rise, dollar gains on another US government gong show By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The US yields rose, and the dollar extended gains yesterday as the looming US government shutdown drama got the only remaining big rating agency company Moody's to sound cautious about the US' AAA rating. 'Debt service payments would not be impacted, and a short-lived shutdown would be unlikely to disrupt the economy', they said, but 'it would underscore the weakness of US constitutional and governance strength relative to other triple-A rated sovereigns.' Both S&P and Fitch have downgraded the US credit rating this summer, over a potential US default in the context of debt ceiling drama.   The US 10-year yield advanced past the 4.55% level and could advance even higher due to political tensions and an increased treasury issuance for long-dated papers. Rising US yields helped the US dollar gain more strength across the board. The US dollar index, which was already propelled into the bullish consolidation zone following the Federal Reserve's (Fed) pledge last week to maintain rates higher for longer, hit a fresh high since last November. Even if it sounds funny, the dollar could profit from safe-haven inflows if the government shutdown drama doesn't last long. During the last US government shutdown, in 2018 – which was, by the way the longest shutdown since 1970s - the US dollar gained against most major currencies. Of course, the longer a shutdown lasts, the bigger the impact would be on the economy, and potentially on the US' credit rating. And the bigger the impact on the US growth and its credit worthiness, the more likely we see the US dollar get – at least a small – hit from another political gong show. For now, though, don't pull all your eggs out of the US basket, because, the dollar could well strengthen despite the political shenanigans in the US, and the US stocks could see increased inflows, as well. The last time the US government was shut in 2018, the S&P500 rallied 13%.   Yesterday's renewed dollar rally pushed the EURUSD below a critical Fibonacci level yesterday. The EURUSD slipped below the major 38.2% Fibonacci retracement on last September to July rally, and was thrown into a medium term bearish consolidation zone. The expectation that inflation in the euro area may have eased significantly may have enhanced the euro selloff before investors had a glimpse of the latest update – due later this week. Cable tested the 1.22 support to the downside, in a move that could extend toward the 1.2080 level, which is the major 38.2% retracement on pound-dollar's last year rally. The dollar-franc rises exponentially above the 200-DMA, after last week's surprise Swiss National Bank (SNB) pause convinced traders that the end of a strong franc era could be coming to an end, as long as inflation in Switzerland remains under control. Gold fell, trend and momentum indicators turned negative, and the yellow metal is about to post a death cross formation where the 50-DMA is about to cross below the 200-DMA, which could further fuel some short-term selloff. And the USDJPY is flirting with the 149 level, with traders determined to defy the Japanese officials' threats of direct FX intervention into the 150. Released this morning, the Bank of Japan's (BoJ) core CPI came in steady at 3.3%, higher than 3.2% expected by analysts. Normally, a stronger-than-expected inflation data would revive the BoJ hawks, and rate hike expectations and lead to a stronger yen. But, the BoJ isn't much concerned about inflation when they decide on their rate policy, they are more concerned about how to keep an absurdly loose monetary policy without causing more bleeding in the yen.  In energy, the barrel of US crude stabilizes around the $90pb, the daily MACD index fell to the negative territory for the first time since the beginning of September, and the impact of US shutdown drama on growth outlook, and the deepening real estate crisis in China, with Evergrande's latest default on a 4 billion yuan onshore bond, could add another layer of uncertainty in global financial markets, and trigger a much-awaited correction in oil prices. The $86/87 range is a reasonable target for those looking for a minor downside correction in oil prices without having to bet on a dramatic trend change.    

BoE between a rock and a hard place.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   As widely expected, the Federal Reserve (Fed) maintained its interest rates unchanged at this week's meeting and President Jerome Powell cited that the recent surge – especially in the long end of the US yield curve – helped tightening the financial conditions in the US. Powell repeated that the Fed is proceeding carefully but that they are 'not confident that inflation is on path toward 2%' target'. US policymakers redefined the US economic outlook as being 'strong', from being just 'solid'.  In summary, the latest Fed decision was not dovish, unsurprisingly hawkish, and did not impact appetite in US bonds which got a boost from the Treasury's announcement of a slightly lower-than-expected quarterly refunding auction size for the 3, 10 and 30-year maturity bonds next week. Cherry on top, the US Treasury said that they now expect one more step up in quarterly issuances for the long-term debt, whereas the expectation was multiple more step ups.   The US 10-year yield sank to 4.70% after the Fed decision and Treasury's much-awaited issuance calendar reveal, the 30-year yield fell to 4.90%. The fact that the US will borrow slightly less than previously thought and slightly less on the long-end of the curve doesn't mean that the fiscal outlook improved. Though lower-than-expected, the $776bn that the US Treasury is planning to borrow this quarter is a record for the last 3 months of a year. And the net interest payments on the US federal debt are rising at an eye-watering speed. In numbers, the federal debt rose more than a third since the end of 2019, and the interest expenses on that debt rose by almost 40%. That's a detail for Janet Yellen who thinks that the surge in US yields is explained by the positive economic outlook, but the market won't allow the Treasury to borrow like its pockets have no bottom if the Fed is not part of it.   Bad news, good news the sharp decline in October ISM manufacturing PMI and the softer-than-expected ADP read helped boosting sentiment in US Treasuries, as they somehow softened the otherwise strong US economic outlook. The JOLTS data unexpectedly rose but no one was out looking for reasons to sell Treasuries yesterday, so that basically went unheard. The official US jobs data is due Friday and any strength in NFP, or wages could reverse the optimism that the US economic growth will... slow. And as bad news is sometimes good news for the market, the S&P500 rebounded more than 1% and closed the session at a spitting distance from the all important 200-DMA, while the rate-sensitive Nasdaq jumped almost 1.80%.   AMD, Qualcomm gain, Apple to report On the individual level, AMD jumped almost 10% yesterday. Even though the company gave a soft guidance for Q4, they said that they expect to sell more than $2bn worth of AI chips next year. That's a lot, that's more than a third of the actual revenue they make. Qualcomm jumped nearly 4% in afterhours trading, as the world's largest seller of smartphone chips gave a better-than-expected prediction for this quarter, saying that the inventory glut in mobile-phone industry may be receding.   Today, Apple will post its Q3 earnings, after the bell. We have reservations regarding the results as the iPhone15 sales are not as brilliant as investors hoped they would be, and Huawei is apparently eating Apple's market share in China. Apple's overall revenue is seen down by around 3%. Ouch. The good news is that the morose expectations could be easier to beat. Otherwise, we could see Apple tank below the $170 per share, into the bearish consolidation zone, and become vulnerable to deeper losses.  BoE not to raise rates, but its inflation tolerance The Bank of England (BoE) is the next major central bank to announce its rate decision today, and the Brits are not expected to raise the interest rates at today's MPC meeting, but they are expected to increase their tolerance faced with above 2% inflation, instead. That's not good for central bank credibility, even less so when the BoE's credibility is not at its best since the start of this tightening cycle. If investors sense that the BoE will let inflation run hot, by lack of choice, sterling could take a significant hit.   Gold and oil  Appetite in gold eases as Israelian attacks are perceived as being less aggressive than what they could be. De-pricing of Mid-East risks could send the price of an ounce to, or below the 200-DMA, near the $1933 level. Upside risks prevail, but fresh news should gradually lose their shocker impact and the $2000 per ounce level will likely attract top sellers more than anything else.   US crude rebounded near the $80pb yesterday, as the decline toward the psychological $80pb level brought in dip buyers. We could reasonably expect the US crude to correct toward $85pb as geopolitical tensions loom, and supply remains at jeopardy.    

Therefore, the US 2-year yield may have bottom at 4.80% level and should be headed back toward 5%. The US 10-year yield should hold ground above 4.50%. As per equities, the direction is unclear to everyone, but the recent dovish shift in Fed expectations and the dropping yields gave a great energy boost to the US stocks. The S&P500 jumped more than 10% since end of October, the rate-sensitive Nasdaq 100 is now flirting with the highest levels since summer while the Russell 2000 index is having a blast since its October dip. The index rallied almost 12% in 3 weeks, pulled out the 50-DMA, the major 38.2% Fibonacci retracement and consolidated gains in the medium-term bullish consolidation zone yesterday.   As equities move higher and inflation slows, the anxiety regarding short positions mount – hence short covering is adding to the positive pressure.   The Big Short's Micheal Burry reportedly exited his short position against SPDR's P&P500 and Invesco's QQQ and began betting against semiconductor stocks, including Nvidia.   Nvidia, on the other hand, is flirting with its ATM levels near the $500 per share level. A quick glance at Nvidia's long-term price chart clearly suggests that the chances are that we are in the middle of an AI-led bubble and that the exponential move cannot extend infinitely. Yes, AI is boosting Nvidia's revenue and profits, but the revenues that will flow into the pockets of Nvidia thanks to AI are already embedded in the share price, and we will likely see the price bubble burst. But there are two things to keep in mind when you bet against a bubble. 1. A bubble is a bubble only when it bursts – it's like 'you are innocent until proven guilty'. And 2. You can wait a while before the market comes back to its senses. For now, we are in the middle of making eye-popping predictions and beating them. The company is due to release earnings on November 21st.  One big risk for Nvidia is the tense relations between the US and China, and the extension of chip export curbs to a bigger range of Nvidia chips. This week's meeting between Biden and Xi carried hope that the high-level communication could help melting ice. There has apparently been some 'real progress' in restoring military communication and foreign policy... Then, Joe Biden said that Xi is a dictator.

Disinflation is on this year's Thanksgiving menu The US dollar index rebounded yesterday, and the rebound was on the back of some data points that cooled down the Fed doves' enthusiasm. First, the short-term inflation expectations advanced to a seven-month high in November, with Americans expecting a 4.5% jump in prices over the next year. Then, the University of Michigan's sentiment index improved more than expected, and the weekly jobless claims fell the most since June – all negative for the Federal Reserve (Fed) doves.   Adobe Analytics said that Thanksgiving shopping will be up by 5.4% this year, and no it is not because of inflated prices. On the contrary, according to Adobe e-commerce prices fell for the 14th straight month, by 6% from last October to this October and if we factor in the online deflation, the Thanksgiving spending growth would be an eye-popping 12%. But it's always the same old story. Americans spend, but they spend their savings, and worse, they spend on debt. In this context, the use of buy now spend later options has jumped by 14.5% since last year – and it will certainly hit back, one day. For now, the US 2-year yield remains real steady around the 4.90% level, the US 10-year is headed back to fresh lows since this fall, after a short attempt for a rebound yesterday and the dollar index is back to testing the 200-DMA to the downside.  Happily, for the American people, the Fed doves and all of us, disinflation is on the menu of this Thanksgiving. Turkey prices cost around 5.6% less than last year, stuffing mix costs nearly 3% less, pie crusts are nearly 5% cheaper and cranberry prices are down by more than 18%. It is said that an average 10 people Thanksgiving feast would cost less than $62 - that's less than $6.2 per person, down from around 4.5% compared to last year.   Last word  Thanksgiving is one of the calmest trading days of the year. Expect thin trading volumes and higher volatility.  

Too dovish Falling energy prices help softening global inflation expectations and keep the central bank doves in charge of the market, along with sufficiently soft economic data that points at the end of the global monetary policy campaign. This week, the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) kept rates unchanged – although the RBA said that they could hike again if home-grown inflation doesn't slow. But overall, the Federal Reserve (Fed) is expected to cut as soon as in May next year, and the European Central Bank (ECB) is expected to announce six 25 basis point cuts next year. If that's the case, the ECB should start cutting before the Fed, sometime in Q1. It sounds overstretched to me.   Data released earlier this week showed that French industrial production fell unexpectedly for the 3rd straight month in October, Spanish output declined, and German factory orders fell 3.7% in October versus a 0.2% increase penciled in by analysts. The slowing European economies and falling inflation help building a case in favour of an ECB rate cut, but I don't see the ECB cutting rates anytime in the H1. Remember, economic slowdown is the natural response that the ECB was looking for to slow inflation. Now that it happens, the bank won't leave the battlefield before making sure that inflation shows no sign of life. But the EURUSD is understandable extending its losses within the bearish consolidation zone, as the German 10-year yield sinks below the 2.20% level. The EURUSD is now testing the 100-DMA to the downside. Trend and momentum indicators are comfortably bearish and the RSI hints that we are not yet dealing with oversold market conditions. Therefore, the selloff could deepen toward the 1.07/1.730 region.  The direction of the EURUSD is of course also dependent on what the USD leg of the pair will do. We see the dollar index recover this week despite the falling yields driven lower by a soft set of US jobs data released so far this week. The JOLTS data showed a significant fall in job openings in October, while yesterday's ADP print revealed around 100K new private job additions last month, much less than 130K penciled in by analysts. There is no apparent correlation between this data and Friday's official NFP read, but the fact that independent data point at further loosening in the US jobs market comforts the Fed doves in the idea that, yes, the US jobs market is finally giving in. On the yields front, the US 2-year yield remains steady near 4.60%/4.65% region, while the 10-year yield fell to 4.10% yesterday, from above 5% by end of October. This is a big, big decline, and it means that investors are now ramping up the US slowdown bets. That's also why we don't see the US stocks react to the further fall in yields. The S&P500 and Nasdaq both fell yesterday, while their European peers extended gains regardless of the overbought conditions. The Stoxx 600 closed yesterday's session above the 470 level. The softening ECB expectations are certainly the major driver of the European stocks toward the ytd highs; German stocks hit an ATH yesterday despite the undoubtedly morose economic outlook. Actual levels scream correction.      

Surprise dovish twist By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve (Fed) wraps up the year with a resounding finale. The Fed is not bothered to see the US yields fall in preparation for a rate cut. On the contrary, they endorsed the idea of a policy pivot thanks to an encouraging fall in inflation and sounded way more dovish than everybody expected at their announcement yesterday – which clearly exposed that the policy pivot is coming. This is the major take of the final FOMC meeting of the year, and it was totally unexpected. Jerome Powell still said – just for the sake of saying – that 'it is far too early to declare victory' over inflation, but the committee lowered their inflation forecasts for this year and the next, and the so-called dot plot – which plots where the Fed officials see the interest rates going – plotted a 75bp cut in Fed funds rate next year. The median expectation now suggests that the Fed rate will be lowered to 4.6% by the end of next year. And that's quite a big change compared to last time the Fed President spoke to say that the rates would stay high for long. It now appears that the rates won't stay high for so long. The first Fed rate cut is now expected to happen in March, with more than 85% probability.  As a result, the US 2-year yield – which captures the Fed rate bets – sank to 4.33% yesterday, and with the dovish message that the Fed sent to the market, the 4.50% level that I saw as a support at the start of this week should now act like a resistance. The US 10-year yield sank below 4%, reflecting the idea that the policy pivot suggests some meaningful slowdown in the US economy. The falling yields sent the S&P500 above the 4700 mark, to the highest levels in almost two years and the Dow Jones Industrial Index hit a record high. There is no reason to stop believing that the S&P500 will soon renew record as well, unless there is a meaningful decline in earnings expectations.   The dovish Fed echoed loudly across the FX markets as well. The US dollar was sharply sold, the EURUSD rebounded back above the 1.09 level, Cable extended gains to 1.2650 and the USDJPY fell almost 1.80% yesterday and slipped below the 141 level this morning. Trend and momentum indicators are comfortably negative, the fundamentals – meaning the narrowing divergence between the more dovish Fed and the more hawkish Bank of Japan (BoJ) – are comfortably positive for the yen, hence price rallies in the USDJPY are now seen as opportunities to strengthen the short USDJPY positions.  Now today, it's the European Central Bank (ECB) and the Bank of England's (BoE) turn to give their final policy verdict for this year. And both Mme Lagarde and Mr. Bailey are certainly annoyed to see the Fed go so soft yesterday, as Christine Lagarde had said herself that no reduction in rates should be expected in the next few quarters. It will be interesting to see if ECB and BoE officials feel comfortable about giving up their tough stance. I still believe that Lagarde will repeat that it's too early to talk about rate cuts, in which case we could see the EURUSD jump above the 1.10 level and finish the year above this level.   Across the Channel, the situation is less obvious. The UK economic outlook is not bright, and wages show signs of slowing. One big argument is that inflation has more than halved in the UK since the start of this year. Yes. But inflation in the UK – though halved – stands at 4.6% which is more than twice the BoE's 2% target. The latter makes the BoE less inclined to initiate rate cuts compared to the other two major central banks.   

A dream comes true. By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank The EURUSD traded south yesterday, as the European Central Bank (ECB) Chief Christine Lagarde reckoned that growth and inflation are slowing, while insisting that the rate cut decision will be data dependent. The pair cleared the 200-DMA support, fell to 1.0820, it's a little higher this morning, but we are now below the 200-DMA and the ECB rate cut bets on falling inflation and slowing European economies remain the major driver of the euro weakness, with many investors now thinking that June could be a good time to start cutting the rates. Three more rates could follow this year. Across the Atlantic, the US released its latest GDP update and the data was as good as it could possibly get. The US economy grew 3.3% in Q4 versus 2% expected by analysts. It grew 2.5% for all of last year –quite FAR from a recession. The consumer spending growth slowed to 2.8%, but remained strong on healthy jobs market and wages growth, business investment and housing were supportive and... the cherry on top: the GDP price index, a gauge of inflation fell to 1.5%. Plus, data from rent.com showed that the median rent rate declined in December, and that's good news when considering that rents have been one of the major drivers of inflation lately, and they look like they are cooling down. In summary, yesterday's US GDP data was the definition of goldilocks in numbers: good growth, slowing inflation. A dream comes true. As reaction, the US 2-year yield fell below 4.30% and the 10-year yield fell below 4.10%. The strong numbers didn't necessarily hammer the Federal Reserve (Fed) cut expectations given that inflation slowed! Investors are not sure that March would bring the first rate cut from the Fed – as the probability of a March cut is around 50%, but a May cut is almost fully priced in. Today, all eyes are on the Fed's favorite gauge of inflation: core PCE – expected to have retreated to 3% in December. A number in line with expectations, or ideally softer than expected could further boost risk appetite.