First Dollar resistance is situated at EUR/USD 1.0760

Markets

Last week’s waiting game extended into the first trading day of the new and jampacked one. Oil prices crashed more than 6% to $71.4/b (Brent) after Israel spared Iranian oil facilities in retaliatory strikes over the weekend. Markets elsewhere were much more contained. Core bonds diverged with US Treasuries underperforming German Bunds. A double US auction added to the move. Both the $69 2-yr and the $70 5-yr one tailed, potentially spelling some difficulties for tonight’s 7-yr one and ahead of the 3-yr, 10-yr and 30-yr auctions next week. These take place against the background of huge event risk: over the next 9 days, markets are served a big economic update, a new president & Congress and a Fed policy meeting. That Treasury marginally trimmed its borrowing estimate (see below) for the Oct-Dec quarter won’t alleviate concerns for the big wall of supply. US yields finished higher on Monday, gains varying between 3 (30-yr) to 5.3 bps (5-yr). German rates undid a higher open to ease up to 1.6 bps at the front. The Japanese yen underperformed global currency peers in the wake of Sunday’s elections which stripped PM Ishiba’s Liberal Democratic Party of an absolute majority. USD/JPY rose to 153.29. Japanese finance minister Kato already took note of the “significant weakening” of the yen. More verbal warnings are likely to follow in coming days. EUR/USD whipsawed and closed around 1.08, DXY did something similar north of 104.

The economic calendar features the first of many releases today. US job openings (September JOLTS) are expected to come in at 8 mln, slightly down from the 8.04 mln in August but still above the pre-pandemic highs of 7.6 mln. Consumer confidence (Conference Board) may pick up slightly in October to 99.5 but that wouldn’t change the confidence stalemate of the past months. The headline indicator has been oscillating around 100 since February of this year. Given the data avalanche that’s still ahead, we don’t expect today’s to leave a significant mark on markets. Instead we keep a close look at some technical resistance areas popping up in the likes of the US 10-yr. The latter tested 4.3% (62% recovery on the Q2-Q3 decline) yesterday and we continue to see the long end as the most vulnerable part of the curve, at least going into the elections. The front/2-yr confirmed last week’s break above 4.09%. Unless economic data this week deliver some blowout upside surprises, markets may feel most comfortable aligning more or less with the Fed dot plot (50 bps of additional cuts vs 43 bps priced in now). First dollar resistance is situated at EUR/USD 1.076 (October low). Sterling is biding its time in a narrow EUR/GBP 0.83-0.835 trading range ahead of tomorrow’s Budget. UK gilts yesterday underperformed in a possible sign of market nervousness.

News and views

The US Treasury said in a statement yesterday that it borrowed $762bn in privately-held net marketable debt during Q3 2024 compared with an estimated borrowing of $740bn. Borrowing was $22bn higher largely because of a $36bn higher ending cash balance ($886bn vs $850bn) partially offset by higher net cash flows. The Treasury expects to borrow $546bn in the final quarter of the year assuming an (unchanged) end-of-year cash balance of $700bn. That’s $19bn less than projected in July ($565bn). On Wednesday, the department will release its quarterly refunding announcement in which it unveils specific plans for long-term debt issuance. During Q1 2025, Treasury expects to borrow $823bn, assuming an end-of-March cash buffer of $850bn.

UK shop prices rose by 0.1% M/M in October according to a metric of the British Retail Consortium. The small gain was driven by non-food prices with food prices flat on the month. In Y/Y-terms, overall prices fell by 0.8% from -0.6% Y/Y in September and the weakest since August 2021. Food price inflation slowed from 2.3% Y/Y to 1.9% Y/Y with non-food price deflation unchanged at -2.1% Y/Y (falling on annual basis since April). BRC chief executive Dickinson said that the downward trajectory is vulnerable to ongoing geopolitical tensions, the impact of climate change on food supplies, and costs from planned and trailed government regulation. Wednesday’s budget by Chancellor Reeves is also causing some unease among employers.

Download The Full Sunrise Market Commentary