Midterm Elections Could Have Meaningful Impact on Yields — Market Talk
1239 ET - The outlook for Treasury yields "is highly dependent on Middle East conflict, Ukraine, Russia [and] potentially midterms," DWS's George Catrambone says. November's election could determine the future of the war in Iran, which has been driving oil prices, he says. "Ultimately 10-year yields have been fairly well correlated to the price of oil." Catrambone says the pace of investment on artificial intelligence infrastructure can also be affected by the midterms. Given the uncertainties, his investment strategy is "to be nimble." Catrambone likes high-grade corporate bonds that are trading at a discount, while selectively adding lower quality yields aiming at a "strongly yielding portfolio and one that is diversified." ([email protected]; @ptrevisani)1231 ET [Dow Jones]--The EU's recent trade talks with China, which saw both sides agree to an annual cap on Chinese hybrid and plug-in hybrid vehicles entering the bloc and lower tariffs on EU goods like olive oil and car parts shipped to China, could be a stepping stone to look at addressing trade imbalances in other sectors, Helen McEntee, Ireland's trade minister, says at a meeting in Dublin Friday. She says that the EU has made progress in its trade relationship with China, "albeit in a limited way on certain industries and certain types of products," she says. "I would see that as a platform and perhaps a stepping stone to look to more industries and sectors where we can address that imbalance," she says. ([email protected])1152 ET - "The European Central Bank is currently facing a very complex set of circumstances," KfW economist Dirk Schumacher says. Inflation remains well above the central bank's 2% target, and the recent rise in oil and gas prices means this is likely to remain the case. But at the same time wage growth is slowing and households' inflation expectations show no signs of accelerating, he says. The ECB must also take into account the sharp rise in interest rates on longer-term products, which in itself will dampen growth and, consequently, inflationary pressure, he says. All of this points to the ECB holding rates next week, though policymakers will likely send a strong signal that further monetary-policy tightening remains necessary, Schumacher says. ([email protected])1144 ET - At its meeting next week, the European Central Bank cannot avoid talking about France, Berenberg economists say in a note. The response should be three-fold, the economists say. "First, to the extent that the French creeping crisis is affecting the outlook for growth and inflation in the eurozone as a whole, the ECB needs to take that into account." This strengthens the case for staying on hold, and indeed markets have already scaled back their expectations for rate hikes in the last four weeks. Second, the ECB may signal in a worsening crisis that it has tools such as the Transmission Protection Instrument to shield other countries from contagion. Third, the ECB will stress it can only support France if Paris returns to more sustainable fiscal policies. ([email protected])1127 ET - Bitcoin is up 0.5% to $81,568, turning around along with the Nasdaq Composite after tech and AI stocks slumped the prior day. While bitcoin has felt that pressure, the fact that it's managed to stay above the $80,000 mark is a point of optimism for cryptocurrency investors, says James Butterfill of CoinShares in a note. "Bitcoin has remained relatively resilient this week despite another bout of volatility across risk assets." Butterfill says that the fundamentals for bitcoin remain mostly balanced, but "a surprise October hike would likely be more disruptive than a well-signalled December move" from the Federal Reserve. The Fed will decide whether to hike or leave interest rates unchanged in its meeting next week. ([email protected])1111 ET - Toronto's CD Howe Institute think tank says the Bank of Canada should keep its policy rate unchanged next week, bucking consensus among traders for a quarter-point increase to 2.50%. The institute's monetary-policy panel says Canadian data suggest core CPI remains around the BOC's 2% inflation target, making it "difficult to make the case for a hike." Panel members who advocated for a rate hold add there are major events in coming weeks — such as U.S. midterm results, the federal budget plan, and a Dec. 31 deadline on U.S. auto tariffs — which could influence inflation dynamics and the output gap. ([email protected]; @paulvieira)1059 ET - The probability of sharp interest rate cuts by the Fed next year has increased in derivative markets, according to Barclays research. Investors are increasingly paying up for protection against steep Fed rate cuts rather than rate hikes, the bank's analysts say in a note. Despite the Fed's September hike, "the probability of policy rates being below 3% over the next year has actually increased since before the September FOMC." Barclays expects short-term yields to fall faster than long-term ones as the Fed cuts. ([email protected]; @ptrevisani)1043 ET - Part of the acceleration in real retail sales in Canada in 3Q is thanks to a strong handoff from the prior quarter when FIFA World Cup spending and government stimulus checks were supportive, according to CIBC Capital Markets' Katherine Judge. The economist says the weak end to 3Q retail trade in volume terms that was suggested by the advance estimate for September isn't a good sign for 4Q spending, with elevated gasoline prices still eating into discretionary spending power at a time when the labor market is under pressure due to trade uncertainty. Headline sales rose 1.2% on-month in August and by an estimated 0.7% in September. ([email protected]; @RobbMStewart)1032 ET - A rise in Canadian retail sales in August mainly was due to a rebound from the month before rather than any genuine strengthening in demand, says Capital Economics' Bradley Saunders. Still, the economist says there still were signs in the data that households are showing resilience amid higher gasoline prices. "That will add to the Bank of Canada's concerns that weak demand is becoming less of a barrier to firms passing on higher energy costs, supporting a hike next week," Saunders says. Retail sales rose 1.2% on-month in August, more than enough to reverse the prior month's fall.([email protected]; @RobbMStewart)1017 ET - Resilience in Canadian spending numbers supports the expectation the Bank of Canada will raise interest rates next week, Desjardins' Oskar Stone reckons. Retail sales rose 0.2% on-month in August, rebounding from weakness in July and roughly in line with estimates. Sales were up broadly, and sales excluding autos and gasoline were a solid 1.1% higher. The flash estimate suggests sales rose 0.7% in September, with goods prices up for the month it suggests sales volumes were likely flat, Stone says. He estimates 3Q GDP growth is tracking at around 2%. ([email protected]; @RobbMStewart)1001 ET - Firm Canadian retail sales for August highlights consumer resilience amid ongoing uncertainty, but a softer September points to cooling momentum heading into the final quarter, Bank of Montreal's Shelly Kaushik says. Retail sales rose 1.2% on-month in August, a tick below the flash estimate, with trade up in all sectors and across six of 10 provinces. Sales also were up 1.2% in volume terms, which Kaushik says puts monthly GDP in line with the 0.2% rebound forecast by Statistics Canada. The preliminary estimate for September sales points to a 0.7% rise, which the economist says was likely largely driven by higher prices. ([email protected]; @RobbMStewart)0856 ET - Treasury yields edge higher following Thursday's decline as markets grow convinced the Fed will hold rates steady next week despite rising oil prices. Threats of escalation in the Middle East push Brent crude up 2% to $115 a barrel. Meanwhile, markets price in 92% odds of a Fed hold, according to CME, although a hike is expected for December. U.S. manufacturing and services PMIs at 9:45 a.m. ET are expected to tick lower, according to a WSJ consensus. The October University of Michigan consumer sentiment index, at 10 a.m., is also expected to decline. The 10-year yield is at 4.984% and the two-year at 4.682%, both on pace for a weekly decline. ([email protected]; @ptrevisani)