The US Treasury market followed a familiar pattern last week, testing recent lows before rebounding. Despite the lack of a strong trigger like a speech from Powell or retail sales data, the movement was more erratic. The NY Fed reported an increase in services business activity in November, with strength in both current and future employment. The NAHB housing index also saw growth, reaching a 7-month high. This positive data, combined with the uncertainty surrounding the presidential elections and the Fed’s stance, led to short-term consolidation in the market.
In terms of global markets, German Bunds underperformed US Treasuries, signaling a potential shift in the market. The EUR/USD pair benefited from relative yield dynamics, moving higher. The ECB’s Stournaras hinted at a potential rate cut in December, which could impact market expectations. The ECB’s reaction function is based on criteria such as inflation outlook and monetary transmission strength, with a focus on wage growth data. Annualized wage growth has remained above the central bank’s 2% target, but recent declines are seen as positive in the fight against inflation.
Looking ahead, the ECB’s Lagarde emphasized the need for a more efficient single market for goods and capital to boost productivity. She highlighted the challenges posed by a changing geopolitical landscape and the need for Europe to keep pace with emerging technologies. Lagarde suggested redirecting savings into long-term investments to drive innovation and growth. Trade barriers within the EU’s single market are seen as a hindrance to economic potential.
San Francisco Fed economists released research showing that the US labor market continues to contribute to inflationary pressures, albeit to a lesser extent than in previous years. Despite declines in excess demand, elevated demand still adds to inflation. This contrasts with Fed chair Powell’s earlier statement that the job market was not a significant source of inflationary pressures.
Overall, the financial markets are navigating through various economic data releases and central bank actions, with a focus on inflation, labor market dynamics, and global economic trends. It remains to be seen how these factors will impact market sentiment and investment decisions in the coming weeks.
