The Market Today

Yield Curve Flattens as Global Central Banks Adjust to Inflation

by Craig Dismuke, Dudley Carter


Manufacturing Indices and Construction Spending: Both the ISM (9:00 a.m. CT) and Markit (8:45 a.m.) October manufacturing PMIs are scheduled for release today.  The ISM index, which has remained resilient despite continued supply chain disruptions and labor shortages, is expected to decline from 61.1 to 60.5.  Also today, September’s construction spending data for September is expected to show a small improvement from August’s disappointing stagnation.


ICYMI – October 29, 2021 Weekly Market Recap: Markets were quite active last week amid corporate earnings, an influx of economic data, and continued signs that global central banks are starting the process of moving away from emergency-era accommodation. The Dow, S&P 500, and Nasdaq each closed at a record Friday after several weeks of stronger-than-expected corporate earnings announcements, despite fears about the impact of labor imbalances and supply-chain disruptions. Those factors led to slower growth last quarter based on the first GDP estimate. Economic growth slowed from annualized rate of 6.7% in the second quarter to 2.0%, while real final sales, which excludes a 2.1% boost from inventories, contracted 0.1%. Nonetheless, there continued to be signs that central banks are collectively preparing to pare back accommodation amid stronger inflation pressures. Hawkish surprises from central banks in Canada and Australia sent 2-year yields in those countries soaring 22.1 bps and 66 bps (not a typo), respectively. Those moves helped lift the 2-year Treasury yield 4.4 bps to 0.50%. Ahead of this week’s Fed meeting, data Friday showed wage pressures rising and inflation running at its highest level in decades. More active central banks raise the risk of overtightening as they seek to control inflation, potentially at the expense of economic activity. The recent run-up in rates has led to flattening sovereign curves, a trend that continued last week. The 10-year yield fell 8.0 bps to 1.55%. On Wednesday, the spread between the 2-year and 10-year Treasury yields touched 1.03%, the flattest since August 23. Click here to view the full recap.

Mixed Results in China Spoil Solid October PMI Data Elsewhere in Asia: Manufacturing PMIs in most smaller Asian countries perked up in October, with Vietnam, Malaysia, and Thailand joining others in expansionary territory after several months of contraction. Data from China, however, was mixed. A private survey of smaller Chinese manufacturing firms inched up from 50.0 to 50.6 while the official manufacturing PMI slipped from 49.6 to 49.2, a seventh monthly decline and a second month of contraction. The October reading for the official PMI was the weakest since 35.7 in February 2020. China’s official services PMI cooled more than expected from 53.2 to 52.4, near the low end of the pandemic range.


Equities Scale New Records to Start November before a Key Fed Decision and Labor Market Update: The Treasury curve steepened modestly overnight as U.S. equity futures signaled new records amid a solid start to the new month for global risk sentiment. European equities jumped sharply at the open with Europe’s Stoxx 600 up 0.5% just before 7 a.m. CT at a new record high. The positive push followed mixed results in Asia, where most major indexes outside of China and Hong Kong gained. Hong Kong’s Hang Seng dropped 0.9% and China’s CSI 300 slipped 0.4% following disappointing manufacturing PMIs for the world’s second largest economy (more above). The PMI disappointment also helped drag iron ore prices, a key power source for Chinese manufacturing, down more than 4% to multi-week lows. In addition to corporate earnings, investors will be keenly focused on the Fed’s Wednesday decision and Friday’s payroll report. Shorter yields have rocketed higher, including last week (more above), on signs that central banks, despite growth slowing some in recent months, plan to pare back policy accommodation amid stronger inflation pressures. The 2-year Treasury yield was 1.8 bps higher at 7:20 a.m. CT to 0.52%, a new high since March 2020. After declining last week, the 10-year yield added 2.3 bps to 1.58%. In addition to the Fed, decisions from central banks in Australia (Tuesday) and the U.K. (Thursday) are expected to make headlines with some policy change expected by markets.

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