US equities were stronger on Tuesday, encouraged by a small beat on US employment cost index which was up 1.1%qoq in Q3, vs consensus at 1.0%. Private wages and salaries ex-incentives slowed to 1.0%qoq. The US conference board consumer confidence was robust, down 1.7pts in October. In the details, labour market differential (jobs plentiful minus hard to get) ticked slightly higher, but still pointing to higher unemployment. US10yr yields up 2bps to 4.92%.
The US Treasury’s Quarterly Refunding Statement today will tell the market of the composition of the issuance over the next 3 months, from bills to bonds. There needs to be an increase in the average maturity, or tenor, will this transpire.
Being a bear on longer term rates, given the elevated inflation uncertainty, unfavourable bond-equity correlations and the wall of UST supply, it was interesting to read the findings of Roger Francis’ regression model, which he published on the platform Coodash. He took monthly data from 1970 to the end of 2021. The model is based on T-bill rates, core inflation, Federal debt, not held by the Fed, the current account position and the volume of debt held by foreigners. As can be seen below it fits pretty well as a model for US 10yr yields. Running the model forward on more recent data the model now points to 10yr yields being over 6%.
In Europe, following the placatory stance set by Lagarde, ECB’s Nagel remained hawkish, saying that it is not possible to say if ECB rates have neared a peak, and that they cant let up on rates too soon.
Asia’s focus was on the new Korea Investment and Securities issue (DFHOLD) $400m 3yr fixed at CT2+219.5. It opened strongly, 11bps tighter and further buying took it 15bps tighter. Demand was from both onshore and offshore real money.
Following the USDJPY move towards 152.00 Japan Chief Cabinet Secretary stated he wont rule out any steps to respond to disorderly FX moves, although he wouldn’t comment on FX levels.
Caixin PMI came as no surprise. New export orders for Chinese manufactured goods have shrunk for 4 consecutive months. Lower production and muted client demand weighed on purchasing activity. Citing higher prices for raw materials and oil manufacturers said that the rate of input inflation ticked up to a 9-month high. Business confidence softened again, now at the lowest level since September 2022.
Looking to this evening in the US the market expects no change from the Fed. We also US JOLTs job openings, Sep and ADP employment for October.