Investors will see lot events this week that could sweep away the biggest hurdles to a full-blown race into riskier assets, if things line up right.
Over 2-H of the week, possible catalysts for a Treasury market sell-off will arrive in close succession: Policy decisions from the US and eurozone central banks are expected to offer no fresh hints of easing in the cards, and the UK election could finally pave a more resolute course for an exit from the EU.
Treasuries were on the ropes Friday, thanks to a US payrolls report that surpassed analysts’ expectations. That pushed the S&P 500 to nearly a record high, drove market pricing for a full Fed rate cut to the end of Y 2020, and thrust the 10-year yield toward the upper end of its recent range, at around 1.84%.
The events ahead will determine the macro-economic backdrop heading into the New Year, but the question for investors is how much of the real action next week is already baked in.
Global growth headwinds from trade friction have helped pull benchmark US 10-year yields down about 80 bpts in Y 2019, driving Treasuries to a 7.3% return this year through 5 December. It is shaping up to be the best annual performance since Y 2011.
Treasuries could take a hit ahead of the week’s high-profile events if the consumer price index reading due on 11 December, the same day as the Fed decision, shows an annual increase faster than the expected 2%. That could unsettle the widely held view that inflation pressures are nowhere near strong enough to fit the Fed’s stated criteria for a rate hike. But there is also potential for yields to fall should the 13 December retail sales figures counter the market’s conviction that the US consumer is holding up.
While the data may fall short of alarming the Fed’s inflation Hawks, it’s clear from Chairman Powell’s recent statements that his view of the economy is biased toward optimism, as a glass “more than half full.”
There has not been much in comments from Fed speakers to suggest they have downgraded projections for interest rates, which will be updated Wednesday, since September. At the time, the “dot plot” of policy makers’ views suggested that the majority see the next move as a hike rather than a cut, and most expect rates to remain on hold or move higher in Y 2020.
Whichever way traders see the risks tilting through year-end, the week ahead could be 1 of the last good opportunities of the decade to jump into the action, before clearing out for the Holidays.
Much of the potentially market-moving action in the week ahead is offshore, with the ECB’s decision and the UK election. But markets will also be looking for signs of movement in trade talks ahead of the 15 December US tariff deadline
The FOMC’s meeting tops the domestic agenda:
- Dec. 11: FOMC rate decision and Powell press conference
- Dec. 13: New York Fed’s John Williams discusses topics in monetary policy
The economic calendar
- Dec. 10: NFIB small business optimism; nonfarm productivity; unit labor costs
- Dec. 11: MBA mortgage applications; consumer price index; real average earnings; monthly budget statement
- Dec. 12: Producer price index; jobless claims; consumer comfort; household change in net worth
- Dec. 13: Import/export prices; retail sales; US economic survey; business inventories
The Treasury auction schedule
- Dec. 9: $42-B of 13-week bills; $36-B of 26-week bills; $38-B 3-year notes
- Dec. 10: $24-B of 10-year notes
- Dec. 12: 4-, 8-week bills; 30-year bond re-opening
Have a terrific weekend.