September Week 3, Looking Back and Looking Forward

Bonds' Surge Impacts Global Markets: Looking Forward

Following the recent FOMC meeting, it was the bond markets that made the most significant waves, driving yields higher. Surprisingly, not even the US dollar could sustain its rally, despite the surge in yields. Global stock markets also took a hit, as investors started to take the Federal Reserve's stance on higher, prolonged interest rates seriously. Amidst a packed economic data calendar featuring US PCE inflation, consumer sentiment, GDP, retail sales, and international indicators like China's PMIs and Australian CPI, the behavior of bond yields in the upcoming week is poised to determine the importance of these economic data points.

Looking Back to September Week 3

The Federal Reserve's decision to maintain interest rates, coupled with upgraded forecasts for growth and inflation, reinforced the notion of "higher for longer" interest rates in the US. The possibility of further rate hikes looms, even if money markets are not yet factoring them in. Additionally, softer US jobless claims data after the Fed meeting indicated that the US economy is resilient in the face of higher interest rates, at least for now. Bond yields responded by surging, with the 20 and 30-year yields increasing significantly. This caused global equity markets to decline, particularly impacting technology stocks and pushing the Nasdaq 100 to a 5-week low, on track for its worst week in six months. Meanwhile, the Bank of England and the Bank of Japan held their interest rates as expected.

Bondcano: Will Yields Crush Sentiment?

Looking ahead to the upcoming week's economic calendar, it seems that many high-tier data releases have lost their luster in the wake of the recent FOMC meeting. For instance, PCE inflation would likely need to deviate significantly from estimates to change the market's expectation that the Fed is in a prolonged hold mode with a higher likelihood of hiking rather than cutting rates. The critical focus appears to be on the behavior of bond yields, often referred to as the "bondcano." If yields continue to rise and remain elevated, the risk assets in the market are in danger of facing a significant downturn. Any potential pullback in yields could boost sentiment, but given the current trajectory, such a scenario seems improbable. Key markets to watch include Bonds/Yields, USD/JPY, AUD/JPY, GBP/JPY, EUR/JPY, Nasdaq 100, S&P 500, Dow Jones, Nikkei 225, China A50, Hang Seng, and VIX.

US PCE Inflation and Its Implications

Recent months have seen the annual rate of US inflation rise, partly due to energy prices and base effects. However, the core measure of inflation is what truly matters going forward. The Fed's preferred gauge is the personal consumption expenditure series (PCE), which will be released in the upcoming week. Core PCE is less volatile than core CPI and has exhibited more stability. With the Fed emphasizing the permanence of high rates, it would take a significant downside surprise in PCE data for markets to ignore the Fed's recent messaging. Therefore, PCE data is unlikely to be a market-moving factor, unless it unexpectedly exceeds expectations, leading to renewed speculation about another Fed rate hike. Key markets to watch include EURUSD, USD/JPY, WTI Crude Oil, Gold, S&P 500, Nasdaq 100, and Dow Jones.

US Consumer Confidence and Beyond

The upcoming week will witness the release of two US consumer confidence measures: the Conference Board Consumer Confidence survey and the University of Michigan Survey of Consumers. These two surveys have diverged since March 2020, with the latter being more pessimistic and volatile but having a smaller sample size. Both measures have recently trended lower, which needs to continue to reduce the likelihood of prolonged higher interest rates. However, if bond yields persist in their ascent, it could have a detrimental effect on sentiment and the broader economy. In addition to consumer confidence, second-tier data such as US retail sales, GDP, and jobless claims will be released, with retail sales offering insights into consumer sentiment and potential economic cooling. Australian inflation and retail sales will also be monitored for any impact on the Australian dollar, and China's PMIs will be scrutinized to gauge the health of the Chinese economy, particularly the services sector. Market watchers should keep an eye on USD/CNH, China A50, and Hang Seng for potential market movements.