Is the bond sell-off over?

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Is the bond sell-off over?

Debt investors were given some relief this week as bonds rallied, pushing the yield on benchmark US Treasuries down from a 16-year high, after stronger-than-expected jobs data on October 6.

Ten-year Treasury yields fell 0.15 percentage points this week to 4.63 per cent, despite a brief bounce on Thursday when official figures showed the US inflation rate had failed to ease in line with expectations. Yields move inversely to prices.

After a market rout in which benchmark US debt yields rose 1.6 percentage points over six months, investors and economists are now asking whether interest rates and bond yields have peaked.

A number of Federal Reserve speakers this week signalled that the central bank may have finished raising interest rates, with Philip Jefferson, Fed vice-chair, suggesting that the sharp rise in long-term yields may be helping curb the need for further rate rises. 

Analysts at Capital Economics think bond yields will continue to fall “because we think that disappointing growth and lower-than-expected inflation will lead the Fed to cut rates sooner and by more than what is currently discounted in the markets”.

But others are not convinced. Florian Ielpo, head of macro at Lombard Odier Investment Managers, expects monetary policy to remain on the hawkish side while inflation persists above target and dwindling savings rates pushes up real interest rates — rates after accounting for inflation — as the lower amount of capital available increases its cost.

“Both factors combined make 5 per cent for the US 10-year a solid anchor,” he said. Mary McDougall

Is UK inflation still falling?

Most economists expect that data released on Wednesday will show UK inflation slowing again in September.

A larger-than-expected fall in the annual headline rate of price growth to 6.7 per cent in August prompted the Bank of England to leave interest rates unchanged in September after 14 consecutive increases. Another decline in inflation could help reinforce investors’ expectations that the BoE will keep rates on hold at its next meeting on November 2.

Economists polled by Reuters forecast that consumer price inflation will have declined to 6.5 per cent last month, with core inflation easing to 6 per cent from 6.2 per cent in August.

However, a surprise increase in inflation could change market expectations. Labour market data, released on Tuesday, will also be closely monitored by investors and policymakers for signs of persistent domestic price pressure. 

Ellie Henderson, economist at Investec, said that annual adjustments to private school fees and higher petrol prices would push up inflation in September but she thought that those would be outweighed by easing price pressures for food and clothing.

Unofficial measures of food inflation, such as retail inflation and grocery inflation published by the British Retail Consortium and research company Kantar, have both showed easing price pressures in September.

The declining inflation trend should continue beyond September, according to Sanjay Raja, economist at Deutsche Bank. “After sizeable upside surprises through the first half of the year, we see inflation continuing its descent largely unabated in the second half of 2023,” he said.

He also expected that inflation would be lower than the Bank of England’s projections both in September and over the remainder of the year.

However, Investec’s Henderson warned about “upside risks” to the inflation outlook, particularly because of higher energy prices resulting from the war in Israel and Gaza, the oil supply cuts by Saudi Arabia and the damaged gas pipeline in northern Europe. Valentina Romei

How fast is the Chinese economy growing?

With China struggling to restore faith in its economic outlook and foreign investors still avoiding Chinese stocks, markets will be focused on the country’s third-quarter gross domestic product reading released on Wednesday, as well as on potential moves in benchmark interest rates.

The median forecast from economists polled by Bloomberg tips the economy to have grown 4.5 per cent year on year in the third quarter. That would be slower than the second quarter — largely thanks to a now-absent base effect — and also markedly below Beijing’s goal for annual growth of “about 5 per cent”.

Economists at ANZ expect growth to match expectations on the back of improvements across the other major data due to be released on Wednesday — industrial production, retail sales and fixed asset investment — with outperformance in any one of these potentially pushing shares higher.

The growth readings are likely to colour expectations heading into Friday’s interest rate announcements, with most economists expecting Chinese banks to leave the benchmark one and five-year loan prime rates unchanged.

But ANZ economists suggest “there is a chance the banks may decide to cut the one-year LPR by 0.05 percentage points”, potentially delivering a boost to short-term liquidity in China’s banking system. Hudson Lockett