Marketmind: Hunt for Yield

A look at the day ahead in U.S. and global markets from Mike Dolan.

With the British government in the process of ripping up its bond-busting budget of tax cuts, restive sovereign debt markets caught a break on Monday as another packed week of key corporate earnings and global economic soundings got underway.

Few investors now doubt we’re in for a nervy year end for world markets either way as sticky U.S. inflation data has pushed futures to price a peak in U.S. Federal Reserve interest rates at close to 5% by March.

And that has increased recession angst again in turn, with the inversion of the 2-10 year U.S. Treasury yield curve – seen widely as a gloomy harbinger of downturns – back as much as 50 basis points and eyeing its most negative since 2000.

Worries about liquidity in the U.S. government bond market were also underlined late last week as Treasury asked primary dealers whether it should buy back some of its bonds to improve pricing and activity in the $24 trillion market. There were also reports of further disturbance in UK fixed income markets following the recent ‘gilt’ shock.

But hopes new British finance minister Jeremy Hunt would reverse many of the unfunded and budget-breaking tax cuts of his predecessor Kwasi Kwarteng, who was sacked on Friday, helped lift UK ‘gilts’ and the pound somewhat on Monday.

Hunt is expected to at least delay a cut in income tax as well as reversing a decision to halt a corporate tax hike. But doubts remain about whether the budget will be enough to stabilise the country’s debt and bond markets amid the need for huge energy price supports for households and with widespread speculation new Prime Minister Liz Truss will now be ousted too.

UK 10- and 30-year gilt yields fell back to Friday morning’s levels and the pound edged higher ahead of Hunt’s statement at 1000 GMT – with added nerves in the bond market after the Bank of England on Friday ended its two-week direct intervention to buy gilts on the open market.

Gilt yields remain more than half a percentage point above levels seen before the Sept. 23 ‘mini budget’ and markets moved back to price a full percentage point BoE rate rise at next month’s meeting. UK September inflation data, out on Wednesday, is expected to show a jump back above 10%.

Elsewhere, China’s markets held steady after President Xi Jinping doubled down on the country’s zero-COVID policy and rattled sabres over Taiwan as he kicked off a Communist Party Congress at the weekend.

China releases third quarter growth numbers on Tuesday amid worries bout capital outflows. China’s national financial accounts, which cover stock and bond markets and direct investment flows, show a net $101 billion was pulled out over the six months to June, putting 2022 on track to record the largest annual such outflows since 2016.

Markets were also keeping close tabs on the falling Japanese yen, with Japanese authorities keeping up warnings of a firm response to rapid declines as the currency plunged to 32-year lows last week after meetings of global financial leaders that barely acknowledged currency volatility.

Otherwise, U.S. banks continue to top the earnings slate. Goldman Sachs (NYSE:) is planning a major reorganization to combine its biggest businesses into three divisions with its storied investment banking and trading businesses being merged into a single unit.

Key developments that should provide more direction to U.S. markets later on Monday:

* New York Fed’s October manufacturing index

* U.S. corporate earnings: Bank of America (NYSE:), Bank of New York Mellon (NYSE:), Charles Schwab (NYSE:)

* UK finance minister Jeremy Hunt presents changes to planned government budget

* European Central Bank Vice President Luis de Guindos speaks in Madrid, ECB chief economist Philip Lane speaks in Frankfurt

(By Mike Dolan, Editing by Susan Fenton mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)

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