US Treasury bond yields have risen significantly, reflecting both the continued resilience of the US economy and the prospect of more bond issuance to fund deficits. In Europe, the latest data confirms the weakness in the industrial base of core member states.
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US bond yields swing higher
The pendulum has swung from investors overestimating how much further the US Federal Reserve is likely to cut policy rates to perhaps understating the extent of what is needed.
The Atlanta Fed’s GDPNow model estimate of real GDP growth in the third quarter is running at an impressive 3.3% (seasonally adjusted annual rate).
The continued resilience of the US economy combined with the sense that there are no fiscal hawks on their way to Washington after next month’s elections have been factors contributing to a sell-off in US Treasury markets, with the benchmark 10-year yield now trading up at around 4.25%.
Markets still expect a quarter-point rate cut at each of the Fed’s two remaining policy meetings this year (on 7 November and 12 December), but they are also pricing in an outside chance that Fed policy stays on hold at one of these meetings.
Publication on 1 November of US job creation data for October may provide the next big clue about the future path of US monetary policy. According to Bloomberg, the consensus among economists is that employers will have added 125 000 jobs in October, down sharply from 254 000 in September — a figure was well above consensus estimates. The unemployment rate is expected to have stayed flat at 4.1%.
Our fixed income team expects this data to confirm that the US labour market is continuing to rebalance. The much lower payrolls figure expected for October may not necessarily reflect a big slowdown in activity, but rather the impact of recent major hurricanes and strike action. The numbers will be scrutinised, not least because they are published just days before the US presidential election on 5 November.
Polls still suggest it will be an extremely close race and the election will likely bring significant changes to trade, regulations and fiscal policies; multiple rate paths are possible for monetary policy.
Eurozone economy still stuck in a rut
Economic activity continued to shrink in October according to a survey of purchasing managers.
Composite purchasing manager indices (PMIs) for the eurozone held broadly stable at 49.7 in October versus 49.6 in September.
However, with activity below the level of 50 and thus in contractionary territory, it raises concerns about the outlook for the eurozone labour market.
Layoffs in car manufacturing
Confirmation of the risks to jobs in manufacturing came on 28 October. According to representatives of the works council, Germany’s largest car manufacturer plans to close at least three of the group’s 10 factories in Germany. It was not specified which plants would be affected or how many of the company’s nearly 300 000 employees in Germany could be laid off. Such a restructuring would mark the first closure of domestic plants in the company’s 87-year history.
The car industry is considered crucial for Europe’s prosperity. It provides direct and indirect jobs to 13.8 million people, representing 6.1% of total European Union (EU) employment. Around 2.6 million people work in direct manufacturing of cars, representing 8.5% of EU employment in manufacturing.
Carmakers in Europe have been warning that radical measures are needed due to intense competition in China, slowing sales across other major markets, and the need to navigate the costly transition to electric vehicles.
The PMI data also showed manufacturing in France as particularly weak, with a sharp drop in new export orders – likely tied to the car sector, as indicated by INSEE statistics.
On 25 October, credit ratings agency Moody’s revised France’s outlook to ‘negative’ from ‘stable’ due to mounting uncertainty about the government’s ability to curb budget deficits, but it maintained its rating on French debt at Aa2.
ECB sounds more dovish
Although data for the rest of the eurozone shows continued resilience to the drag from the core economies there have been dovish signals from European Central Bank (ECB) policymakers.
A 50bp rate cut at the monetary policy meeting on 12 December is now a clear possibility. This would come after the ECB this month lowered official rates for the second time in a row — and the third time this year — to 3.25%, pointing to declines in inflation and growing concerns over the economic recovery.
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