The pullback in crude oil prices is providing relief to bond markets and adding fuel to the global stock rally. Notably, European bonds surged with France getting an extra lift from presidential frontrunner Marine Le Pen’s pledge to bring the country’s deficit below 3% of GDP by 2032 at the latest.
USD pared back some of its recent gains. HUF leads the FX scorecard buoyed by growing confidence in Hungary’s path to the euro. Central bank Deputy Governor Zoltan Kurali reiterated that Hungary could adopt the euro as early as 2031 if the government meets the common currency criteria by 2029.
JPY is underperforming. The agenda of Japan’s Government Pension Investment Fund’s September meeting showed there was no discuss around portfolio allocation. Also, BOJ Governor Ueda’s comments offered no hint of a faster BOJ tightening. We expect USD/JPY to hold within a 155.00-160.00 range in the near term.
Treasury Secretary Scott Bessent attempted to jawbone the long-end of the yield curve after 10-year Treasury yields surged to 5.34% yesterday, the highest since April 2002. Bessent said “I think we’re going to see this past quarter, third quarter, we grew well in excess of 3% — and I think we can consistently do that…Then, what is important is the debt-to-GDP, and we will start bending that curve and bringing it down…I think it could happen very, very quickly.”
The Atlanta Fed GDPNow model estimates annualized real GDP growth of 3.7% in Q3. Sustaining that pace alongside fiscal consolidation could help the US grow its way to a lower debt burden.
But that’s highly unlikely. US real GDP growth has average 2.5% in the past 10 years and the Congressional Budget Office projects the primary budget deficit (overall budget balance excluding interest expense) to average -2.1% over the next ten years, pushing federal debt to a record 120% of GDP by 2036.
Regardless, long-term Treasuries look increasingly attractive. 10-year Treasury yield exceeds the S&P 500 trailing earnings yield by over 150bps, leaving investors poorly compensated for taking equity risks. Moreover, higher bond yields tighten financial conditions, and weigh on the growth outlook, which should help pull real yields lower.
The US September ISM indexes back the Fed’s tightening bias and is USD supportive. The headline services and manufacturing indexes point to resilient growth and the Prices Paid indexes signal inflation pressures are intensifying. Fed funds futures continue to price in a full 25bps hike to 4.00-4.25% in December.
On deck today: US August trade balance which will feed into the Atlanta Fed’s updated GDPnow estimate. Fed speakers include: Fed New York Fed President John Williams, St. Louis Fed President Alberto Musalem (non-voter), Fed Vice Chair Michelle Bowman, and Kansas City Fed President Jeffrey Schmid (non-voter).
