Markets Steady As Duration Sell-Off Stalls

WHERE WE STAND – Yesterday, at first, gave off ‘Groundhog Day’ vibes, as long bonds sold-off once again, and as sentiment seemed rather fragile.

Mercifully, things soon steadied, with calmer heads prevailing as the duration sell-off took a bit of a pause for breath after the benchmark 30-year Treasury yield kissed 5.0%, dip buyers emerged in the equity complex, and the dollar rally fizzled out. Heck, even Gilts ended the day a fair chunk firmer!

The net result of all this is that, after 2 proper trading days in September, we’re essentially back to where we started for most assets. A lot of noise, quite a lot of misplaced excitement, and not especially much signal thus far, then. Perhaps tomorrow’s US labour market report might give us a clearer steer on how things may progress for the rest of the month and, if not, at least should clear up whether the September Fed cut will be a dovish, or a hawkish one.

As for fresh fundamental developments, I best start in the UK yet again, where we finally have a date for the Budget – 26th November, the latest possible date for the Budget still to be an autumn one. The choice of that date is interesting for other reasons, though, as Chancellor Reeves ‘goes long’ in the hope that some sort of miracle may emerge to shrink the fiscal ‘black hole’ by the time of the OBR’s final forecast. It’s also interesting as it means the Budget will come a day before Thanksgiving, potentially exacerbating liquidity issues in the Gilt market.

The practical implication of now having a firm date is that we now have 12 weeks of Treasury trial balloons, government sources stories, jittery UK markets, and generally elevated uncertainty ahead of us. That does nobody any favours whatsoever, and is also likely to cripple both business and consumer decision-making for the next three months.

Elsewhere, the latest US job openings data gave markets a short-lived JOLT, most notably allowing Treasuries to build further on earlier gains, as vacancies unexpectedly fell to 7.181mln in July, the lowest level since September last year. Such a print is broadly consistent with the ‘slow hiring, slow firing’ jobs story that I’ve been harping on about for some time now, and clearly strengthens the case for a Fed cut later this month, an outcome which markets now price as a 95% probability.

Dovish policy expectations are one of many factors that continue to propel equities higher, with solid earnings growth, resilient economic growth, calmer tones on trade, and potentially some stability in long-end govvies also helping to strengthen the bull case. Quite clearly, the path of least resistance for stocks continues to lead higher, and dips should still be viewed as buying opportunities.

As all of that is bullish equity, it’s probably equally bearish USD, not only as haven demand wanes, but also as growth picks up in a relatively synchronised fashion across the board. Sprinkle on top the continued erosion of monetary policy independence, and you have not only a strong case for the buck to be marked down rather significantly, but also a strong case for hard assets such as gold to continue gaining ground.

The yellow metal, again, notched new record highs yesterday, very much living up to the idea that all-time highs simply beget yet more all-time highs, as we’ve seen so often in the equity space in recent years. While momentum is clearly on the bulls’ side, increased physical demand and chunky inflows into gold ETFs, coupled with the convincing fundamental bull case, mean that the rally in bullion still looks sustainable, with further gains likely on the cards.

LOOK AHEAD – A few items of note on today’s economic docket, as we gear up for the week’s main event, tomorrow, in the form of the August jobs report.

Highlighting things today, though, will be last month’s ISM services survey, set to have ticked higher to 51.0, from a prior 50.1. Of course, the employment sub-index also bears watching closely, ahead of the aforementioned jobs data but, in that vein, ignore the ADP employment report which is also out today, as that’s only good for telling us what the NFP print won’t be come Friday lunchtime.

Besides that, we have the weekly US jobless claims stats to digest, though neither print pertains to the August NFP survey week, along with the latest eurozone retail sales report, and remarks from NY Fed President Williams. None of that is likely to be particularly market-moving, though earnings from Broadcom (AVGO) after the close could be, especially with the bar a high one after Nvidia’s solid report this time last week.