Summary and Price Action Rundown
Global risk assets were mostly becalmed overnight in quiet pre-holiday trading although upward movements in sovereign yields continue as investors ponder the likelihood of a broad economic rebound in 2020 and global central banks generally maintain their ultra-easy policy settings. S&P 500 futures point to a flat open, which would hold the index around Tuesday’s record peak with year-to-date gains of over 27%. Equities in Asia and the EU were gently mixed overnight. With US-China trade on the backburner for now, global central banks largely on hold, and global economic data showing selective improvement, investors are expecting placid markets into year-end (more below). An upward drift in sovereign yields has been one area of clear directionality in markets this week, with the 10-year Treasury yield breaking above its multi-month range at 1.95%. With EU, Japanese, and other sovereign yields moving up in tandem, the dollar is finding little support from the rising rates, while the pound has stabilized after reversing some of its recent upside this week amid reemergent concerns over Brexit and dismal growth data. Oil prices are holding near six-month highs after bullish US inventory data.
Multiple Factors Drive Sovereign Yields to Multi-Month Highs
Expectations of a 2020 global growth recovery, which have been fueled by some recent improvements in economic data, alongside highly accommodative policy settings by major central banks and an increasing emphasis on fiscal stimulus, are pushing longer-dated sovereign yields to their highest levels since mid-year. Analysts are noting a confluence of current factors that support rising longer-duration developed market sovereign yields, including global growth data recently surprising to the upside, major central banks on hold but highly accommodative, and diminished safe haven demand as trade and Brexit risks recede. Yields on 10-year bonds in the US, Germany, the UK, and Japan are all at their highest level since mid-summer or before. Traders also note upward impetus on rates from anticipation of a moderate global economic rebound in 2020, as well as an increasing focus on the potential for fiscal stimulus to play a greater role in supporting worldwide growth next year. Additionally, analysts suggest that diminishing enthusiasm for negative interest rates among global central bankers and other economic officials is putting a floor under sovereign yields. Earlier today Sweden’s central bank, the Riksbank, hiked rates 25 basis points to bring its policy rate out of negative territory and a senior Japanese government official criticized the effectiveness of the Bank of Japan’s negative interest rate policy, while calling for greater coordination between fiscal and monetary policy. The Bank of Japan retained its current ultra-accommodative policy settings at its meeting today, as did the Bank of England. Later this week, upbeat readings of US personal spending and income data for November, as well as core personal consumption expenditure prices (core PCE), the Fed’s preferred measure of inflation, could spur Treasury yields higher.
More Dismal UK Data but Bank of England Holds the Line
Disappointing retails sales figures for November are the latest in a series of worryingly poor UK economic readings, but the Bank of England held policy steady today, shoring up the pound for now. The pound is pausing its week-to-date slide this morning, but is still nursing losses of 1.8% versus the dollar since Monday, after the Bank of England (BoE) held rates steady as expected but conveyed a slightly more upbeat assessment of the economic outlook than traders had been anticipating. Contrasting with the BoE’s cautious optimism, headline retail sales for November significantly undershot expectations, printing 1.0% year-on-year versus a forecast of 2.1% and the prior month’s 3.1%. Meanwhile, Tuesday’s readings of UK job vacancies and wage growth were softer than expected while Monday’s releases of preliminary December purchasing managers’ indexes for both the manufacturing and service sectors surprised to the downside and reflected a deepening contraction in activity. This deteriorating economic picture comes alongside the abrupt reemergence of “hard” Brexit risk earlier this week, as Prime Minister Johnson proposed legislation that would set a deadline for the transition period, during which a new EU/UK trade agreement is to be hammered out, at the end of next year regardless of the state of negotiations. Futures markets assign a 50/50 chance of a rate cut by the Bank of England by next summer, but the choice of Governor Carney’s successor, who will take the helm in February next year, could alter those odds.
Additional Themes
Markets Still Unmoved by US Impeachment – President Trump’s impeachment by the Democrat-led House of Representatives last evening is having no discernable impact on financial markets today, with analysts focused on his continued support in the Senate.
Italian Political Risk – Italian sovereign bonds are underperforming today as investors focus on rising risks of an early election in spring that ends the tenure of the moderate ruling coalition. Nevertheless, with the 10-year yield at 1.41%, the overall level remains very favorable.