Surging US Bond Rally Raises Rate Cut Expectations Amid Strong Q3 GDP Performance
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Nothing says 'let's save the planet' like a summit led by a big oil CEO
By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank
The rally in US bonds continued at full speed yesterday and bonds are set to record their best month since the GFC this November. The US 2-year yield tumbled to almost 4.60% yesterday from nearly 5% at the start of the week. While the 10-year yield rebounded after hitting 4.25%. That makes an almost 40bp fall for the US 2-year yield and a 25bp fall for the US 10-year yield in three days only.
A faster fall in short-term yields means that that the market is busy pricing rate cuts (which we know it does), yet the amplitude of the move is relatively big.
Released yesterday, the US Q3 GDP was revised to an eye-popping 5.2% from an already high 4.9% printed earlier. The consumer spending component was revised slightly lower, and the price pressures seemed softer than previously announced. But we could easily say that the US economy's Q3 performance made China jealous!
If you dig deeper: even though yesterday's above-5% GDP print would've been an excellent trigger for a rebound in the US bond yields and the dollar – on belief that the US economy is strong enough to allow the Federal Reserve (Fed) to keep rates 'high for long' - it also surfaced the worries (or hope) that this incredible performance can't last!
And guess what? The Atlanta Fed's GDP Now forecast – which beautifully predicted last month's above-average performance – is now pointing at a sharp decline in the US GDP growth in the current quarter to around 2%. Note that a 2% growth in the US is still above average and shouldn't be enough to convince the Fed to start cutting the rates too early if the slowdown in inflation remains insufficient. But if inflation slows, nothing will stop the bond traders from continuing to rush in.
Today, all eyes on the US PCE index – the Fed's favourite gauge of inflation. The headline PCE may have eased from 3.4% to 3.0% in October, and core PCE is seen down from 3.7% to 3.5%. A softer-than-expected figure could further fuel expectations of an early Fed cut, while a stronger-than-expected set of figures should, in theory, calm down the dovish enthusiasm and call for a rebound in the yields. Presently, activity on Fed funds futures gives almost 80% chance for a Fed rate cut in May, and the probability of a March cut is 50-50.
