An eventful week ended with front-end leading as yields surged after a blowout Sep jobs report. Non-Farm Payrolls jumped 254,000 vs expectations of 150,000, with prior 2-months both being revised upwards by +72k. The Unemployment Rate dipped to 4.1% and Average Hourly Earnings were up 0.4% m/m, edging up to 4.0% year on year. Boom! Time to re-assess the need for a steep rate cut trajectory.
2yr yields peaked at 3.92%, up over 20bps on the day and 36bps from Monday’s lows. 2s10s flattened to +6bps dis-inverting 18bps from last week’s highs. 10yr yields slipped very quickly from 3.6% after the September rate cut to 3.97% this morning,
Several banks revised their Fed rate cut calls Bank of America and JPMorgan quickly shifted from 50bps to 25bp calls for the November FOMC.
Austan Goolsbee is a big supplier of FedSpeak recently, swinging from “tight policy is raising recession risks, and that the Fed must stay ahead of labour market weakness, pointing out that labour market deterioration happens quickly, to ebuliantly saying that the jobs report is superb on Friday and that the two prongs of Fed policy are in balance. His rhetoric is a fickle as the markets pricing.
USD continues to bounce back, USDJPY hitting 149.00 and the USD index (DXY) spiking to 1239.50, the highest since Aug 16th and up 1.6% since Powell’s comments last Monday.
Asia credit spreads have tightened against US Treasuries in this downturn, with cash price bonds around unchanged to down 25 cents. China and HK bonds remain in favour, despite the recent rally. Sri Lanka is up 2-2.5pts on news they aim to complete restructuring in Q4.
The downturn in China’s property market triggered a series of well publicised policy interventions. It continues to be under pressure. Contracted sales for September fell 2% m/m (42.6% y/ y). Many developers, such as Vanke and Longfor, reported sales below operating cash flow breakeven levels, underscoring the urgent need for intervention.
The new policies include cuts to mortgage rates, down payment ratios, and support through the PBOC’s lending facilities. However, the effectiveness of these policies will depend on successful implementation and sales sustainability. Expect a bounce in Tier 1 and 2 cities, but ongoing support is needed to stabilize property prices and reduce inventory levels.
The outlook for developers with USD performing bonds remains cautiously optimistic, with their near-term repayment ability tied to sales recovery and continued funding support. Distressed developers could also benefit from the equity rally, which improves the prospects of restructuring plans. The snap back in China property prices has been very sharp over recent sessions, while China has been off on Golden Week holidays.
China is still pursuing a long-term strategy of transitioning away from property dependence and fostering new economic drivers, including consumption and tourism, and the stimulus is expected to benefit gaming, e-commerce, and F&B sectors
Macau’s September GGR (gross gaming revenue) was stronger than expected. Macau gaming bonds have seen renewed interest. Yields on Sands China’s high-grade bonds have slipped from 6.4% in April to 5.125% today. In high yield SJM Holdings (B1) 4yr yields around 6.85% while Studio City (B1) 4yr yields around 6.9%. This is an observation, not investment advice!
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