30-Year Bond Auction in Focus

INTEREST RATE MARKET FUTURES

Futures are lower across the board ahead of today’s $22 billion 30-year bond auction. Minutes from September’s Fed meeting showed that most participants considered it likely that further policy easing would be appropriate through the remainder of the year. However, most officials still emphasized that upside risks to inflation remain tilted to the upside. Underscoring upside risks to inflation is Tuesday’s New York Fed’s consumer inflation expectations survey, which saw near-term inflation expectations rise to 3.4% in September, the highest level in five months. Consumers expect higher prices for food, gas, medical care, and rent. Longer-term inflation expectations rose slightly but remained well-anchored.

Yesterday’s 10-year note auction results were mixed with nonaggressive bidding and strong non-dealer demand. The auction fetched a bid-to-cover ratio of 2.48, below the six-auction average of 2.59. Direct bids took 66.8% of the share, below the 67.8% average. Indirect bids took a strong 24.1% take vs. the 16.8% average, leaving dealers with a below-average take of 9.10%. The auction follows Tuesday’s 3-year note auction, which saw solid results and aggressive bidding.

The spread between the two- and 10-year yields rose to 54.50 bps from 54.00 bps on Wednesday, while the 2-year yield, which reflects interest rate expectations, rose to 3.597%.

STOCK INDEX FUTURES

Stock index futures are little changed across the board. The S&P 500 and Nasdaq notched another record high yesterday as Wall Street stays in rally mode despite the government shutdown, which has delayed the release of several key pieces of data on the US economy. Minutes from the Fed’s September meeting, which were released yesterday, helped lift equity markets. The minutes showed that most policy members judged it appropriate to cut rates further over the remainder of the year, something markets had already largely speculated, but appreciated the official minutes release. On the central bank front, Fed Chair Jerome Powell will speak this morning at the Federal Reserve’s Community Bank Conference.

CURRENCY FUTURES

US DOLLAR: The USD index inched higher to a two-month high as a struggling euro and yen have provided support for the greenback. In the absence of US data, markets have largely focused on French and Japanese political developments. Minutes from the Fed’s September meeting highlighted mixed views on inflation and the labor market but showed that most board members were in favor of further easing policy to support the labor market.

EURO: The euro is lower, continuing its struggles against the dollar following the resignation of France’s Prime Minister Sebastien Lecornu and his government earlier this week. President Macron plans to appoint a new prime minister this week, which is a welcome sign for markets that snap elections in France are likely to be avoided and could help provide a floor to the euro. Discussions with opposition parties also suggest that the government could pass a new budget by year-end, although the outlook is uncertain. On the data front, Germany’s exports dropped 0.5% month-over-month in August to a nine-month low. The decline in exports was primarily driven by weaker demand in EU countries, which saw a 2.5% drop in exports, while exports to non-EU countries rose 2.2%, despite a 2.5% decline in exports to the US. Exports to the US fell to their lowest level since November 2021. Exports to China rose 5.4%, while exports to Russia grew 53.5%. The data follows industrial output and factory orders figures released earlier in the week, which both showed declines in activity. Minutes from the European Central Bank’s September meeting showed that officials agreed that the current policy stance remains consistent with the bank’s medium-term inflation target. Few members saw upside risks to inflation, while most members agreed that deflationary pressures were more likely to affect the euro. Policy is unlikely to be changed in the near term. Italian industrial production figures out Friday will round out the week on the data front.

BRITISH POUND: The pound is little changed against the dollar, paring earlier losses that saw it touch a two-week low against the dollar. The pound recovered following hawkish comments from Bank of England policymaker Catherine Mann, who suggested that rates could stay higher for longer. Mann said on Thursday that inflation expectations in the UK are too high. Meanwhile, BoE Chief Economist Huw Pill urged “conservative central banking,” stressing the need to prioritize inflation control over the need to cut rates to support growth. Both Pill and Mann voted with the majority to keep interest rates unchanged at the last BoE meeting in September. Investors remain on edge regarding potential tax hikes to meet fiscal rules in next month’s budget. Markets will monitor Finance Minister Rachel Reeves’s ability to balance self-imposed fiscal rules and economic growth. Strong taxes could present a downside for the sterling. Markets are pricing in a 10% chance of a rate cut at the BoE’s November meeting as the central bank continues to battle persistently high inflation.

JAPANESE YEN: The yen continued its decline, falling to its lowest level since February, as investors’ expectations over rate hikes from the Bank of Japan have been dampened following the election of Sanae Takaichi and soft economic data. Takaichi favors deficit spending and looser fiscal policy, which has fueled worries over the country’s debt sustainability and consequently weighed on the yen due to her strategy’s implied inflationary effects. On the data front, real wages in Japan fell 1.4% on a yearly basis, marking the eighth consecutive monthly decline as inflation continues to outpace wage growth. The figure, alongside Takaichi’s appointment, complicates the BoJ’s rate hike path, as Governor Kazuo Ueda recently stated the central bank would resume rate hikes if the economy and prices move as projected, which the wages data did not.

AUSTRALIAN DOLLAR: The Australian dollar climbed against the greenback, reversing some losses from earlier in the week. The Melbourne Institute’s inflation expectations survey for October showed inflation expectations edged higher to 4.8% from 4.7%. Consumer sentiment fell in Australia, with the Westpac-Melbourne Institute Consumer Sentiment Index falling by 3.5% month-over-month in October, marking the steepest contraction since April. The drop in sentiment underscores rising household concerns over persistent inflation. Elsewhere on the inflation front, the Melbourne Institute’s monthly inflation gauge showed a 0.4% increase in September, up from a 0.3% drop in August. The uptick in inflation, although not an official reading, added to market sentiment that official Q3 inflation could prove hotter than expected, something that the Reserve Bank of Australia had noted last week as it left rates on hold.

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