We again admit we do not understand the bond market

Outlook

We again admit we do not understand the bond market. Why are yields higher? As discussed before, the implication is that the bond gang does not buy into the soft landing, or at least not yet. Fed funds bettors may see two rate cuts before year-end, but bonds do not. Or it’s an exodus from bonds back into stocks, or something.

It’s making the housing market continue to be sticky. It would take accessible mortgage rates to loosen the frozen joints and get sellers to come out and buyers to go in. If US housing is a bubble to be burst remains to be seen, but the process is grindingly slow. Today Bloomberg reports “US mortgage rates rose sharply for a second straight week, reaching the highest level since early August while prompting steep declines in both home-purchase and refinance activity.

“The contract rate on a 30-year fixed mortgage rose 16 basis points to 6.52% in the week ended Oct. 11, according to Mortgage Bankers Association data released Wednesday. In the last two weeks, the rate has climbed 38 basis points, the most for any comparable period since February 2023.”

Shelter is one of the sticky prices and even if the Fed likes to exclude it, perception of the economy’s health (and inflation) among consumers has to be meaningful.

Forecast

The dollar is on track to continue higher until something comes along. Sentiment has the ECB cutting rates tomorrow, complaining all the way, while the US economy is “too strong” to support the narrative of two more cuts before year-end. The ECB can alter this picture in one fell swoop by declaring this cut the last until inflation data is well and truly better. More than one report acknowledges headline is cut-suitable under 2%, but services inflation remains at 4% in Sept, down a mere 0.10% from Aug. See the Trading Economics chart.

Then there is the relentless insistence by Fed funds bettors that the Fed will cut twice before year-end—89.8%, according to the CME FedWatch this morning. Only 9.9% think we will get only one cut before year-end. Presumably this causes an undertow of dollar weakness.

But until both sides develop a little more, the exuberant dollar keeps racking up gains, in part on the yield diff and in part on risk aversion from geopolitical and US political, aka the danger of Trump. 

Political Tidbit: Trump disgraced himself multiple times yesterday, after halting the Q&A at a “town hall” and spending 39 minutes swaying to 1970’s pop music, including his favorite, “YMCA” (which he doesn’t know is gay). You have to wonder what the audience was thinking, assuming they were thinking.

At a press interview with Bloomberg at the Economic Club of Chicago, Trump refused to answer whether he would support a peaceful transition should he lose the election. He’s okay with the deficit going to 150% of GDP. He said who pays tariffs is a matter of opinion (it’s not) and the interviewer is biassed.

Trump said he should be able to bully the Fed. "I think I have the right to say I think you should go up or down a little bit. I don't think I should be allowed to order it, but I think I have the right to put in comments as to whether or not the interest rates should go up or down." Clearly he knows nothing of Fed history and what happened when politicians interfere with the Fed—inflation in the 1970’s, the splendid Volcker resigning. Trump also has no plan about how to change the dollar. Sometimes he wants it stronger and other times he wants it weaker. Apparently he sees no connection between interest rates and the dollar, or extreme fiscal deficits and anything else. 

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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