Investment Institute
Macroeconomics

Fever Breaking

  • 06 November 2023 (7 min read)

The Fed message, a tweak in debt issuance and soft payroll combined to take US long-term yields down. The fiscal trajectory remains a major hurdle though.

Good news on inflation and bad news on growth and employment are playing for the doves at the ECB, but the hawks are not giving up.


10-year yields have significantly retreated in the US last week, in reaction to a near-perfect combination. The message from Jay Powell was that, while the Fed’s tightening bias is still there, the bar for another hike is rising. The Treasury announced a tweak in the maturity distribution of its issuance in the next three months towards the front end of the curve. And, finally, the payroll data for October came out of the soft side, with below-trend job creation, a small rise in the unemployment rate and crucially, a further deceleration in wages.

While we might have seen the recent bond market fever breaking, there are limits to the yield retracement. Now that the Fed has explicitly acknowledged the impact of the market-driven tightening in financial conditions in the calibration of its own stance, symmetrically if market rates fall too fast or too far, then the probability the Fed is ultimately forced to hike again would rise. Of course, this would not be needed if the economy continues to soften – and Q4 may well come out as a mediocre quarter. Yet, beyond the cyclical factors, fundamental forces still need to be considered. The Treasury can momentarily ease the pressure on long-term yields by issuing more bills and 2-year notes, but the fact remains that the overall quantum of federal debt will continue to rise, without any clear perspective on a subsequent fiscal consolidation. The behaviour of Japanese investors also needs to be monitored in the light of yet another tweak in the BOJ’s Yield Curve Control.

In the Euro area, the October print confirmed that disinflation is in motion, beyond the mechanical base effects on energy and food. The deceleration in the prices of both manufactured goods and services – albeit more timidly for the latter – is reassuring. The cost of this disinflation is getting plainer to see unfortunately: the labour market is softening, even if the deterioration remains contained for now. The ECB hawks have not given up though, and we review here Isabel Schnabel’s latest speech.

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