European stock markets opened mixed on Tuesday, with the FTSE 100 down about half a percent and the DAX up by the same. Yesterday, the Dow Jones slipped 350pts, and the S&P 500 retreated a touch as Treasury yields backed up a lot amid a swirl of Fed speakers, suggesting the Fed is going to be slower to cut rates. Gold continues to defy all gravity, while silver has also jumped again.
Bonds are moving again as markets start to price the Fed, staying a bit tighter for longer. We had the jumbo cut; then the payrolls were hot. The task for the Fed is a fine one. The 10yr Treasury yield has jumped more than 20bps since last week, from around 4.0% to around 4.22% this morning. Markets think the Fed could even hold rates at the next meeting. The benchmark 10yr UK gilt now yields less – i.e. the spread has reinverted to about -7bps from about +25bps at the start of October – so much for the UK gilt market showing stress the Budget…beware linear thinking is the message here.
Several Fed speakers have been on the wires to get the market moving. Kansas City Fed president Schmid: "My preference would be to avoid outsized moves.” Dallas Fed president Logan also favoured "Gradually lowering the policy rate.” Minneapolis Fed’s Kashkari simply said the appropriate path of interest rates will "depend on the data", favours “more modest cuts over the next several quarters to get to something around neutral”. San Francisco Fed president Daly still favours cutting because "I don't want to see the labour market slow further." Incidentally, today, we hear from ECB President Lagarde and Bank of England Governor Bailey, among others.
Markets think that a Trump win is a) increasingly likely and b) going to be bad for bonds. They are also positioning for broad dollar strength—DXY’s rip higher corresponds to the surge in Trump’s odds. Moreover, a Trump win ought to mean tighter Fed policy, or at least that is the thinking.
Gold has made fresh record highs. It can be seen as a Trump trade proxy, a hedge against tariffs, ballooning deficits, and higher inflation.
Weirdly, gold has massively outperformed the S&P 500 over the last two decades.
Earnings season continues and looks positive. BofA: “21% in, 5% EPS beat so far, manuf. appears to have bottomed, corporate sentiment indicator improved to a record high, and mentions of weak demand fell to 2-year lows.”
Meanwhile, the yen has broken 150 and is now looking to test the 200-day SMA around 151.30.
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