The term "bondcano," used to describe the surge in bond yields at the expense of equities, seems to be cooling down as yields retreat from their recent highs. This development has brought relief to market sentiment, as concerns mounted that the financial system might be on the verge of a crisis. With Federal Reserve members adopting a relatively dovish stance, the question arises whether bond investors will re-enter the market to capitalize on attractive yields and mitigate the impact of the bondcano's recent volatility.
October week 2 witnessed significant events in the financial world. Gold and oil markets opened the week with strong gains due to geopolitical tensions in the Middle East. Fed members expressed concerns about the surge in bond yields, leading to a shift in expectations for a November rate hike. The Federal Open Market Committee (FOMC) reiterated its "higher for longer" stance on interest rates, while US producer prices exceeded expectations. Despite these developments, Wall Street rose, and gold reached an 8-day high, but oil prices couldn't sustain their gains. The Reserve Bank of Australia (RBA) signaled its "third phase" of monetary policy tightening.
In the upcoming week, several key events and themes will shape the financial landscape. Can the bondcano scenario take a backseat as other factors come into play? The UK is set to release data on employment, wages, and the Consumer Price Index (CPI). China's economic data, including GDP, industrial output, and retail sales, will be closely monitored. Canada's inflation report could have implications for future interest rate decisions, and Australian employment data remains a focus.
The recent surge in bond yields drew considerable attention and concern, leading to a correction in bond prices as yields normalize. However, relief is in sight, thanks to the Federal Reserve's more dovish comments and the return of some investors to support the bond market. The question now is whether these developments can be sustained, potentially triggering a risk-on rally.
The Reserve Bank of Australia (RBA) continues to closely monitor employment data, which plays a vital role in its monetary policy decisions. With strong employment figures and slow cooling of inflation, the RBA faces a dilemma regarding future rate hikes. While other economic indicators may point to reasons to keep rates steady, any significant change in employment data could shift the balance. The fate of the Australian dollar (AUD/USD) remains intertwined with US bond yields, the US dollar, and Federal Reserve actions.