US

Thanksgiving week is usually a lighter one when it comes to data releases in the US. Apart from a PCE and core PCE inflation numbers that came in line with expectations at 2.3% and 2.8% respectively, there has not been much data to move the dial. In Europe, on the other hand, there have been a few data releases and central banker interviews that are worth commenting on.

In this month's Flash Fixed Income, we look at how bond markets are reacting to Donald Trump's victory in the US election. With Trump's stated policies widely regarded as being inflationary, we expect a bigger divergence in the path for interest rate cuts between the US and Europe that might favour higher quality European credit.

The relationship between government bond yields and swap rates – otherwise known as the swap spread – has been increasingly in focus, with the market’s attention turning to Europe last week as the 10-year German Bund yield traded higher than the 10-year euro swap rate for the first time ever.

With Donald Trump’s solid victory helping the dust around the US election result settle faster than many might have expected, investors’ attention has promptly shifted to the potential economic and financial market implications of the new administration.

With elevated yields and inflation expected to come back to target, we think investors can target a level of real return that was extremely difficult to achieve in the previous cycle.

With cracks starting to show in the US economy, many are wondering whether tight corporate bond spreads leave investors vulnerable. But with corporate balance sheets holding firm and yields on higher quality bonds looking attractive, staying invested in credit should continue to reward investors.

Friday’s blockbuster jobs report saw a sharp sell-off in the government bond markets, with 10-year US Treasuries selling off by close to 15 basis points (bps), while the 2-year US Treasuries posted a 30 bps move in the same direction, dragging gilts and German bunds with them.

The quantity of cash parked in money market funds has been at the forefront of investors’ minds for some time now. The surge of inflows for these short term risk-free instruments as rates rose was no surprise considering they now yield more than a single-B rated high yield corporate was offering just a few years ago.

Uncertainty is over, it was a 50 basis points (bps) move. As we mentioned in our previous blog, the most important take away from the Federal Open Market Committee (FOMC) meeting would be their assessment of the economy.

While the majority of headlines have concerned whether the Fed will do 25bp or 50bp to kick off its cutting cycle, we think this is only one part of the discussion – and not necessarily the most important one.

With the Federal Reserve (Fed) set to begin its long-awaited interest rate easing cycle at next week’s Federal Open Market Committee (FOMC) meeting, Wednesday’s Consumer Price Index (CPI) inflation report for August was the last big economic release investors could comb for clues as to the size of the first cut.

We struggle to recall a more eagerly awaited US labour market report than that published last week. Stakes were high given the previous report showed a steep rise in unemployment and caused market mayhem in early August, but anyone hoping for a conclusive picture was left disappointed as a mixed set of figures left the strength of the US economy open to interpretation.