Choppy Trade Continues

WHERE WE STAND – Finally, we’re at the end of what’s been a long, choppy, and difficult-to-decipher week in financial markets, which has for the most part lacked major catalysts.

At least yesterday presented some decent data-flow for participants to get their teeth into, even if the figures that were released didn’t move the needle especially much.

October’s round of ‘flash’ PMI surveys served largely to reiterate what was already known, that the eurozone economy remains in a rather significant contraction, and that pre-Budget jitters are increasingly posing headwinds to the UK economy. The latter survey was of more interest, particularly with both the services and composite PMI figures falling to their lowest levels in almost a year, albeit remaining in expansionary territory.

Even without announcing a single new policy – besides cutting OAPs’ winter fuel allowances – Chancellor Reeves & Co. are causing the brakes to be slammed on the economic recovery.

On that note, we heard yesterday that Reeves plans to change the way in which the UK’s ‘fiscal rules’ are monitored, changing the debt measurement used to calculate fiscal headroom to a rather technical metric known as ‘public sector net financial liabilities’. In layman’s terms, this change means greater fiscal headroom, as the figure includes assets such as student loans, and is not solely a measure of liabilities, as is currently used.

If you’re still awake after that – the implication of this shift is that it will allow HM Treasury to increase borrowing, ostensibly to fund investment in infrastructure but, depending on how things are structured, potentially to a limitless extent, especially if funds are funnelled via the new National Wealth Fund. Taking this, and Reeves’ prior pledge to ensure public investment remains at 2.5% of GDP into account, the sum total of additional borrowing over the next five years could run to north of £70bln. And, that’s before any other potential measures are accounted for.

Unsurprisingly, the gilt market has taken a rather dim view of this fiddling of the fiscal rules. 10-year yields rose 5bp yesterday, back to 4.25%, and to their highest level since the Government took office in early-July. At the same time, 2- and 5-year swap rates have jumped, likely soon sparking a rise in mortgage rates, while the spread on Gilts over Treasuries also widened. Another weekend of pre-Budget leaks likely lies ahead, posing further downside risks to Gilts in the short-term.

Elsewhere, yesterday, the weekly US jobless claims figures were something of a mixed bag. Initial claims fell to a one-month low, while continuing claims rose 1.897mln, just beneath the top of the forecast range, and a near 3-year high. The latter figure is, of course, of more importance, given that the data coincides with the survey week for the October jobs report, due next Friday.

I’m loathe to pin the dollar’s modest downside yesterday on the claims figures, though it is more than a coincidence that the greenback extended losses, and Treasuries extended gains, after the figures crossed news-wires. Still, the DXY losing some ground after 3 straight days of gains isn’t likely to be particularly worrying for the bulls, especially with price remaining north of the 200-day moving average. I still favour USD upside here, particularly as pre-election hedging looks far from complete.

In the Treasury complex, it indeed seems that the allure of 4.25% 10- and 4.50% 30-year yields has proved too strong for buyers to resist, with both tenors falling around 6bp yesterday, as the curve bull flattened for the first time in a week. I’d expect further gains here, particularly at the long-end, as polling day looms.

In any case, lower yields provided some relief in the equity space with both the S&P 500 and Nasdaq 100 ending the day in the green, snapping a 3-day losing run, with each notching their first daily gains of the week – it’s taken long enough!

LOOK AHEAD – A quiet docket lies ahead as the week wraps up.

This morning sees the latest German IFO sentiment surveys, with the headline Business Climate metric set to have ticked higher to 85.6, the first MoM increase in the metric since back in April. Still, far too early to be sounding the ‘all clear’ on the German economy just yet.

Stateside, a couple of notable prints are due. Durable goods orders are set to have fallen 1% last month, compared to the stagnation seen in August, though the figure is particularly susceptible to being skewed by Boeing orders, which have obviously been suffering well-documented issues of late. The final read on this month’s UMich consumer sentiment survey is also out later on, with a marginal upward revision to 69.1 expected.