Forecast Table Revised

Bond Market Movers – Review and Outlook

What drove the bond markets last week?

• The stalemate between the U.S. and Iran in the Middle East conflict continues. The mullah regime in Tehran insisted on its conditions for reopening the Strait of Hormuz. Donald Trump rejected them.
• In all major eurozone countries, inflation rose sharply in September. In France and Italy, the inflation rate has jumped by nearly one full percentage point each.
• In the U.S., the core PCE inflation rate for August came in well below expectations due to a surprisingly large benchmark revision. Meanwhile, according to the ADP report, job growth in the U.S. labor market accelerated more rapidly than expected.
• ECB President Lagarde hinted at the need for further monetary tightening, but she spoke of a “measured” approach.
• FOMC Vice Chair John Williams has hinted that the committee might wait until December before raising the benchmark interest rate again.
• The latest auction of long-term French government bonds went rather smoothly. The Trésor was able utilize the target issuance volume of up to 12 billion EUR in full.

What could drive the market next week?

• The financial markets remain in the grip of news from the Middle East and developments in commodity prices. Will the conflict remain deadlocked until the U.S. midterm elections in early November?
• The Fed and the ECB are releasing the minutes from their most recent interest rate meetings. Investors are waiting for clues about the future path of interest rates. • In terms of macroeconomic data, attention will be focused on the gleanings of the U.S. September jobs report and the ISM Services Index.
• Amid a persistent downward spiral in prices for long-term securities, the primary market for U.S. Treasuries must digest the next wave of long-term bond issuances. Meanwhile, supply pressure in the primary market for euro-denominated government bonds is likely to ease significantly compared with last week. We expect gross supply of only about 12 billion EUR, which could potentially rise to 20 billion EUR in case that Italy places a new syndicated bond, following just over 40 billion EUR the previous week. Meanwhile, net cash flows are set to rise just into positive territory due to solid reflows.

Elmar Völker, Senior Fixed Income Analyst