Strong JGB Auction Reassures Markets

STOCK INDEX FUTURES

The indexes are higher as the Nasdaq leads gains as the equities look to bounce back from yesterday’s losses. A risk-off mood brought stocks lower yesterday following a sell-off in the Japanese bond market. However, a solid 10-year JGB auction overnight has helped ease investor worries in the market and lifted sentiment. ISM manufacturing PMI data out yesterday showed that manufacturing conditions in the US continue to remain subdued, with the index falling to 48.2 in November from 48.7 in October. The reading posted the ninth straight month of a contraction in activity as deliveries, new orders, and employment fell. Price pressures also grew, with the prices index rising, although it remained below highs seen in the late spring and summer.

Focus will turn to ISM services PMI data out tomorrow and Friday’s September PCE report.

CURRENCY FUTURES

US DOLLAR: The USD index is little changed after hitting a two-week low on Monday as a stronger yen and increased bets of a December rate cut weighed on the greenback. Markets are now implying over an 87% chance of a December cut, up from around 30% odds by mid-November, as recent comments from several notable Fed officials have been dovish. Wednesday will bring ADP private payroll data alongside Services PMI data from ISM, which will likely impact expectations on policy outlook. Attention should be focused on the prices index regarding the PMI data. Money markets show little chance of a cut following the December meeting into 2026. Division among FOMC members is likely to provide strong headwinds to the path of future easing as inflationary pressures in the economy remain present, especially in the services sector. There is a large amount of labor data due before the January FOMC meeting, which will likely sway opinion at the Fed as data collection efforts resume to normalcy.

EURO: The euro is little changed following the release of CPI and unemployment data for the eurozone. Consumer prices rose 2.2% on the year in November, slightly above expectations of and October’s figure of 2.1%. Meanwhile, the seasonally adjusted unemployment rate in October held flat to September’s upwardly revised (prev. 6.3%) 6.4%, which is still quite low on a historical level. A rise in services inflation was responsible for the uptick in inflation, which rose to 3.5% from 3.4% and marked the highest level since April. Core inflation held steady at 2.4%, just below forecasts of 2.5%. Inflation in Germany rose to 2.6%, while inflation in France, Spain, and Italy all eased. Markets had a relatively mute reaction to the data release, signaling that the figures are not a needle mover for the European Central Bank, as it is expected to keep interest rates on hold for the foreseeable future. Services PMI figures will be released tomorrow and are likely to gather attention. Forecasts are expecting a reading of 52.4. Friday’s slate will include final third-quarter GDP data and unemployment figures for the eurozone alongside industrial production figures from France and Spain.

BRITISH POUND: The pound is little changed. Nationwide’s November house price survey showed that home prices increased 1.8% on the year in November, above forecasts of a 1.4% rise. It is a relatively quiet week of data in the UK as markets continue to digest Finance Minister Rachel Reeves’s new budget, which aims to raise £26 billion in new taxes to support welfare programs. Elsewhere on the data front, mortgage approvals in the UK rose more than expected in October, although net lending to individuals fell below forecasts. Manufacturing PMI came in line with forecasts with a reading of 50.2; services PMI figures will be out on Wednesday. Money markets show a 90% chance of a cut from the Bank of England later in December, which would lower the base rate to 3.75%.

JAPANESE YEN: The yen fell lower, reversing most of yesterday’s gains, as a solid 10-year JGB auction helped stabilize the market and eased investor worries following yesterday’s sell-off in global bonds. Comments from Bank of Japan Governor Ueda led to a selloff in JGBs after he said the BoJ will weigh the “pros and cons” of raising rates at its next meeting later in December. Ueda also noted that future policy moves will be discussed more after the bank raises rates to 0.75%. December’s policy decision will likely be guided by further signals on wage negotiations, known as Shunto, as Ueda has said he would like to see more clarity regarding the negotiations. Increases in wage growth will help support underlying consumer demand and, in turn, support stable inflationary pressures. Early signs from the negotiations point to a solid round of pay hikes in the country, although negotiations should continue to be monitored for signals on how the BoJ will move in December. Markets now price in roughly a 90% chance of a hike in December. Tokyo core CPI figures came in hotter than expected last week, helping firm the case for a rate hike from the Bank of Japan. Prices rose 2.8% on the year in Tokyo, while the unemployment rate remained steady at 2.6%.

AUSTRALIAN DOLLAR: The Aussie is higher, following moves in the equity markets as local data pointed to solid economic growth. Government spending in Australia grew strongly in the third quarter, helping to add 0.4% to the third-quarter GDP figure. The figures come ahead of tomorrow’s third-quarter GDP report, where forecasts are expecting a 0.7% rise in growth. The pickup in growth in the economy has led markets to assume that the Reserve Bank of Australia’s easing cycle is over as inflationary pressures remain.  RBA Governor Michelle Bullock will face questions from parliament on Wednesday and is likely to be asked if the central bank cut rates too quickly in the face of seemingly rising inflation. It seems most probable that the RBA will look to raise interest rates again in 2026 as rising inflation risks appear in the economy.

INTEREST RATE MARKET FUTURES

Yields edged lower at the front end and edged higher at the long end following a reassuring 10-year JGB auction overnight, which offered markets reassurance following a sell-off in global bonds yesterday that was triggered by comments from BoJ Governor Ueda. Investors in Japan hold over $1 trillion worth of US bonds due to ultra-low rates over the past 20 years. A sustained rise in JGB yields could see selling of US Treasuries into JGBs.

JP Morgan’s weekly Treasury Investor Survey showed that investors decreased longs and upped shorts, with all clients moving to the sidelines heading into the end of November. Outright longs were reduced, while outright shorts were at their highest level in over a month.

Looking ahead to December’s meeting, it is likely that the FOMC will see Waller, Williams, Miran, and Bowman all vote for a cut, leaving eight other members’ decisions up in the air. Powell, Cook, and Jefferson have seemingly unknown stances, while Collins, Schmid, Goolsbee, Musalem, and Barr have all offered cautious comments in recent weeks. Given that Williams is a key ally to Powell, that could sway the Chair to vote for a rate cut and bring some other members with him as well.

President Trump said he has made his new Fed Chair pick and that an announcement will come soon. Trump declined to confirm that his nomination to replace Chair Powell will be Kevin Hassett, current director of the president’s National Economic Council. Hassett now has a 64% chance of getting the nomination, according to bets on prediction markets – up sharply from under 40% early last week.

The spread between the two- and 10-year yields rose to 57.80 bps from 55.10 bps on Monday, while the two-year yield, which reflects short-term interest rate expectations, rose to 3.528%.

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