Watch out for the US job report
European equity markets fell yesterday after the shock of the Fed minutes, but they have almost stabilised in the US and the trend has reversed…
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A general decline in equity markets and a dramatic drop in long-term bond yields yesterday in the wake of oil prices. It is also likely that the strong demand at an auction for a 5-year US Treasury bond triggered a short squeeze forcing many traders to hastily buy back their short positions. The 10-year rate is at 1.53% compared to 1.70% last Thursday. The approaching central bank meetings (ECB today, Fed and Bank of England next week) and a very busy economic calendar (US Q3 GDP today, Eurozone GDP and inflation tomorrow) threaten to reveal a reality that the markets have refused to face: growth is slowing, but inflation is accelerating, forcing central banks to hurry up their policy normalization.
Yet the ECB should be the counter-example, with Ms. Lagarde making efforts to reassure the markets that accommodative policy will continue. At the same time nevertheless, inflation is expected to rise to 4.5% in Germany in October and the rather expansionary budget unveiled by the British Chancellor of the Exchequer yesterday has reinforced expectations of a rate hike by the Bank of England. The consensus forecast for US GDP growth appears high at 2.6% based on our own estimates and those of the Atlanta Fed (see the graph below).
The EUR/USD exchange rate continues to yo-yo around 1.16.