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A look at the day ahead in European and global markets

By Wayne Cole, Chief Correspondent, Treasury

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Let’s start with Treasuries because, if this were sports, we’d be calling it a comeback for the ages. Not long ago the market was collapsing so fast that, going by some headlines, civilisation as we know it was under threat.

Now, with some encouraging hints from Fed officials, 10-year notes are poised to celebrate their best month since the 2008 global crash, with yields down 61 basis points for November so far.

A view shows a bronze seal beside a door at the U.S. Treasury building in Washington, U.S., January 20, 2023.  REUTERS/Kevin Lamarque/File Photo

Yields on two-year paper are down 31 bps just this week, the steepest drop since the U.S. mini-banking crisis in March. And almost all of that came because one Fed governor said that, should inflation keep falling for a few months, then policy would need to be loosened just to stop real rates from rising.

Then again, it did come from Governor Waller, normally such a reliable hawk that the sudden conversion to dovishness had a far greater impact. Markets also assume he would not have flagged such a possibility without running it by Fed Chair Powell first.

And Powell just happens to have a Q&A appearance on Friday, so of course bulls are betting that he will accommodate their rate-cut wishes.

Rarely has a “fireside chat” had so much staked on it. Futures have now fully priced in a quarter-point cut in May, and are even 50-50 for March. Fed fund futures for December next year have surged 35 ticks so far this week, taking the total easing expected for 2024 to 115 bps.

Note that influential Fed New York President Williams is speaking later on Thursday, and he carries a lot of weight with investors.

Markets will also be vulnerable to any upside surprise from the U.S. personal consumption expenditures (PCE) report, which they are counting on to echo the benign CPI data and show core inflation slowed to 3.5% in October.

The European Union has inflation data of its own later on Thursday and analysts suspect the risks are for a downside surprise following subdued readings from Germany and Spain.

The median forecast is already for the EU’s HICP inflation to slow to 2.7%, the lowest since mid-2021. That is one reason futures are almost fully priced for an ECB rate cut as soon as April.

The dizzying drop in Treasury yields has left the dollar looking a little green in the gills. The dollar index looks set for its worst month since November last year, with a loss so far of 3.7%.

It is also down 3.1% on the yen, which if sustained would be the sharpest fall this year, while the euro is ahead by 3.8% for the month.

The dollar has lost 2.6% on the yuan, a major move for such a tightly managed currency pair, and failed to get any lift from a rather disappointing China PMI survey on Thursday.

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