• US yields are an insignificant 2 bps lower on the day, ignoring another strong ADP employment report for October (+239k vs +185k expected). German Bunds underperform with yields up to 3 bps higher at the front end of the curve. We retain hawkish comments by ECB Nagel en de Cos after yesterday’s market close. Nagel for example said that the ECB must act decisively in December, as done at the last three meetings. That’s a first strong hint in favour of sticking with the 75 bps pace, which is our preferred scenario, but not discounted by markets yet. Both members stressed that there is still a long way to go with QT (winding down APP portfolio) to start early 2023. EUR/USD tried to regain the 0.99 big figure, but has difficulties in doing so. Main European and US stock markets lose around 0.5%.
• It’s obviously a waiting game, counting down to the Fed decision and to Fed Chair Powell’s Q&A session. A fourth consecutive 75 bps rate hike to 3.75-4% is discounted, with most of the attention going to the central bank’s narrative from here on. We expect a focus/narrative shift to progress made up until now in tightening policy. Those efforts still need to filter through in the economic fabric. The policy rate will clearly be in restrictive territory after tonight, allowing for slowing down the hiking speed from December onwards. Such message appeared in a “planted” WSJ article just ahead of the Fed’s blackout period. Only SF Fed Daly went out in public afterwards and aligned with the message. It marked the start of a correction higher in core bonds and stocks and lower in the dollar. Apart from the pace, Fed members do agree on the need to tighten policy beyond their median 4.5% projection in the September dot plot. Underlying core inflation developments and a still strong labour market create wiggle room to lift rate for example towards 5%, which is currently discounted in Fed Funds future forward curves. From a market point of view, we think that the above-suggested narrative shift by the Fed could strengthen the ongoing correction/consolidation trades across markets. It would imply that recent highs in US yields and the dollar become strong resistance levels, with more room correction lower. First support in the US 10-yr yield stands at 3.9% with 3.5% being the ultimate line in the sand. For EUR/USD, similar references are 1.0094 and 1.0350. In such scenario, stock markets could get some additional breathing room as well.
• The US Treasury announced its Quarterly Refund Statement today. Amounts planned to be raised in the 10y, 20y and 30y tenors during the November-January quarter are unchanged vs the August-October quarter. This means the US Treasury halted the longest string of cuts in quarterly sales of longer-term debt in eight years. These cuts followed a rapidly shrinking budget deficit after pandemic-relief spending ended while the economy rebounded sharply post-lockdowns, spurring tax revenues. As growth slows, the opposite is now happening. The amounts for shorter tenors (2y-7y) are still $1-2bn lower for the first two months of the new fiscal quarter. The Treasury also said it plans to further investigate a potential program to buy back older securities, an idea that popped up a few weeks earlier to address liquidity concerns in certain Treasuries.
• Head of Poland state fund PFR and advisor to the prime minister Pawel Borys said the government may be forced into greater public finance discipline and not extend the so-called inflationary shield next year. The shield is costing the budget more than PLN 40bn this year alone. Together with extra (military and social) spending ahead of elections due in about a year, Polish yields could surge further and create an unsustainable situation. If the anti-inflation measures are taken out, prices could surge up to 24% in February next year, Polish Monetary Policy Member Kotecki said in an interview afterwards. On rate hikes, Borys said the National Bank of Poland may still need to raise rates “several” times in 25 bps steps to around 7.5%. The Polish zloty trades stable today with EUR/PLN testing important support at the 4.70 big figure (200 dMa).