FED: Appropriate To Bring Rates Back To Neutral Setting - Williams
Oct-09 09:36
NY Fed’s Williams (permanent voter) has given an interview with the NYT (full piece here) noting that a less dire inflation outlook gives the Fed flexibility to shore up the labor market. He thinks it’s appropriate to bring rates back to a neutral setting, which he last week indicated could be at a nominal 2.75% or 2.75-3.0% in slightly broader ranges that he’s offered in the past. These remarks firm up the likelihood that he was one of the nine dots looking for further 25bp cuts in Oct and Dec following September's cut (the median view). It’s possible that he was one of the three dots looking for a further three cuts in 2026 to 2.75-3.0% or failing that one of four looking for two cuts. Only two dots were more dovish, at 2.5-2.75%, whilst the median looked for one 2026 cut to 3.25-3.5%.
- He believes the Fed has the flexibility to shore up the labor market because the inflation outlook doesn’t appear as dire as it did earlier in the year.
- From the piece: “Mr. Trump’s tariffs have raised some consumer prices, Mr. Williams said, but he expects the impact on inflation to fade over time despite the president’s new import taxes on products like furniture and drugs.” He added “I don’t see any signs of second-round effects or factors that could be amplifying the effects of tariffs on inflation.”
- “The risks of a further slowdown in the labor market is something I’m very focused on”.
- Also from the piece: “If the economy evolved as expected — inflation moving up to around 3 percent and the unemployment rate inching up beyond its current 4.3 percent — he would back “lower rates this year, but we’ll have to see exactly what that means.”
- He said it was appropriate to bring rates back to a neutral setting but didn’t convey urgency to cut rates rapidly. He said last week that his model estimate points to a real neutral rate of 0.75%, i.e. a nominal 2.75%, but has also mentioned 1% in recent months.
- A shutdown-driven lapse in official government data won’t deter him from wanting to take action at coming meetings. There is specific mention of private-sector providers and surveys both from the Fed and from external sources like the Conference Board or the ISM as being informative.
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GERMAN AUCTION RESULTS: 0% Aug-31 / 2.50% Feb-35 Green Bunds
Sep-09 09:34
| 0% Aug-31 Green Bund | 2.50% Feb-35 Green Bund | |
| ISIN | DE0001030732 | DE000BU3Z047 |
| Total sold | E500mln | E1bln |
| Allotted | E491mln | E851mln |
| Previous | E923mln | E931mln |
| Avg yield | 2.25% | 2.61% |
| Previous | 2.07% | 2.58% |
| Bid-to-offer | 2.27x | 1.62x |
| Previous | 1.10x | 1.92x |
| Bid-to-cover | 2.31x | 1.91x |
| Previous | 1.20x | 2.07x |
| Avg Price | 87.65 | 99.05 |
| Low Price | 87.64 | 99.04 |
| Pre-auction mid | 87.587 | 98.985 |
| Prev avg price | 83.56 | 99.34 |
| Prev low price | 83.52 | 99.34 |
| Prev mid-price | 83.566 | 99.294 |
| Previous date | 02-Nov-22 | 22-Jul-25 |
BONDS: Solid Gilt Auction Helps UK Paper Lightly Outperform German Peers
Sep-09 09:24
The strong 20-year Gilt auction helps UK paper extend this morning’s light outperformance versus German peers. Gilt yields are now 0.5 to 1.5bps higher across the curve, compared to the 0.5 to 2.5bp rise in German yields. The 10-year tenor underperforms on the UK curve, while Germany sees a clearer bear steepening dynamic.
- That leaves the 10-year Gilt/Bund spread 1bp narrower at 195bps, still above the August 25 closing low of 193bps.
- The German 5s30s curve is 1bp steeper at 106.2bps, moving away from this month’s 104.8bp low.
- Bund futures have drifted lower through the morning, currently -24 ticks at 129.07. The 129.00 handle has contained intraday downside for now, with key support not seen till 128.25 (Sep 4 low).
- Gilt futures have moved up to 91.48 following the 20-year auction, still -7 ticks on the session and shy of yesterday’s 91.61 high.
- OAT futures (-6 ticks at 121.83) haven’t seen much reaction to ex-PM Bayrou’s expected ousting following yesterday’s no-confidence vote. President Macron will try and appoint a new PM in the coming days. Note that a roll in Bloomberg’s 10-year OAT benchmark (now the 3.50% Nov-35 OAT) has skewed the 10-year OAT/Bund spread up to above 80bps. Meanwhile, the benchmark 10-year BTP/OAT spread is now negative for the first time.
- Alongside the Gilt auction, the Netherlands and Austria have sold bonds today. German greens are due at 1030BST, with the EU also holding a dual tranche syndication.
- Today’s regional data (French July industrial production and UK BRC shop sales) were not market moving. Global focus turns to the US preliminary payrolls revisions at 1500BST.
FOREX: JPY Rallies as BoJ Report Suggests More Aggressive Tightening Schedule
Sep-09 09:13
- JPY started the session strong, carrying the theme through late Asia and early European trade. The stronger JPY helped aide USD weakness, prompting raising the importance of nearby USD Index support at 97.109, and into the bear trigger of 96.377. It's notable that today's USD weakness has not been triggered by a renewed pull lower in US yields (US 10y yield closed lower by over 5bps yesterday, but has steadied so far this morning).
- Instead, USDJPY selling looks the primary driver. JPY futures volumes are well ahead of average, with volumes supported by a sources report suggesting the BoJ see a strong chance of a further rate hike this year, despite the recent political upheaval in the ruling LDP. The piece reported some BoJ sources seeing the October meeting as a potential opportunity for tightening - a much more aggressive schedule than currently priced in.
- USD/JPY traded through the September lows in response, narrowing the gap with both the 100-dma of Y145.93 as well as decent-sized expiries into Y145.85-00 ($1.4bln).
- Focus for the duration of Tuesday trade rests on the annual benchmark payrolls revisions - which are expected to be marked notably lower for the 12 months into March - helping bolster the Oval Office's case for a more aggressive approach to monetary easing from the Fed. This morning's USD weakness is helping prop the major pairs through to new September highs headed into this week's economic and inflation data (today benchmark payrolls revisions, Wednesday PPI, Thursday CPI).
