Anticipation builds ahead of Fed decision and U.S. Inflation

Bond Market Movers – Review and Outlook

What drove the bond markets last week?

• The price of Brent crude has jumped back above the $100-per-barrelmark for the first time in nearly two months. The military skirmishes between the U.S. and Iran in the Strait of Hormuz appear to be escalating rather than showing any signs of de-escalation.
• As expected, the ECB raised its key rate for the second time since the outbreak of the war in Iran. The new staff projections now show inflation at the end of the forecast horizon slightly above the 2% target.
• The U.S. jobs report for August came in significantly better than expected. Job growth was three times higher than the consensus forecast, while the unemployment rate remained at a multi-month low.
• U.S. President Trump is promising every adult citizen a "dividend" of $5,000 if his Republicans win the midterm elections, contrary to the polls.
• The most recent auction of 10-year U.S. T-Notes has seen the highest investor demand in about ten years. Meanwhile, at the most recent auction of 10-year German government bonds, demand exceeded the volume of bonds offered for sale for the first time in three months.

What could drive the market next week?

• The financial markets are set to remain focused on news from the Middle East and trends in commodity prices. When will a way out of the recent military escalation become apparent?
• The Fed's next interest rate decision hangs in the balance between continuing to wait and see and the first rate hike since July 2023. The consumer price data for August, particularly the core rate, may well tip the scales. We expect the underlying price pressure to ease some what once again.
• The Bank of Japan is poised to accelerate its monetary tightening. It likely will raise its key rate for the second time in just three months.
• In the UK, the BoE is set to maintain its current monetary policy stance for the time being. However, if British inflation rose sharply than expected in August, the central bank could adopt a more “hawkish” tone
• In the primary market for U.S. Treasury securities, the focus next week will be on the tap of the 20-year T-bond. Meanwhile, supply pressure in the primary market for euro-denominated government bonds is likely to rise moderately compared with last week. We expect gross supply to total just under 30 billion euros, compared with 25 billion euros the previous week. Nevertheless, net cash flows are set to surge well into positive territory, as reflows from maturities will be far above average.

Elmar Völker, Senior Fixed Income Analyst