A look at the day ahead in the US and global markets by Mike Dolan
While Americans were partying and getting ready to go shopping, U.S. Treasury bonds have staged quite a rally this week, offsetting significant post-election budget concerns as global bonds find a bid more broadly.
While the squaring of the holiday week and month-end position may explain some of the curious drop in Treasury yields, this move partially undoes at least one of the prevailing “Trump trades” and has dragged the lofty dollar down with it.
Well-behaved U.S. inflation data and decent demand during another tough week of debt selling have helped fuel a rally that began in earnest last Friday when newly elected President Donald Trump appointed Wall Street money manager Scott Bessent as Treasury secretary.
Against the backdrop, Trump’s early threats of trade tariffs may also have dimmed global growth prospects, while nerves in Europe over tense budget negotiations in France appear to have subsided somewhat overnight.
Testing the sustainability of the drop in interest rates may require the new month to start next week, as US stock and bond markets are open for only half a day on the Friday after Thanksgiving.
But the moves have been significant, with 10-year bond yields falling to a one-month low of 4.20% in a month, and 30-year bond yields hitting a six-week low.
Long-term inflation expectations, derived from inflation-protected 10-year government bonds, also fell below 2.3% this week, while inflation swaps are also reversing.
The New York Fed’s estimate of the 10-year “term premium” – the extra compensation investors demand for holding longer-term debt to maturity – is also gone. It is now just 13 basis points and almost a third of its post-election peaks.
Energy markets have helped, with crude oil prices ebbing following the tentative ceasefire between Israel and Hezbollah in Lebanon. US gas pump prices quietly fell to the lowest level in more than three years.
But there is also a feeling that the global growth picture may also be darkening, with the yield curve on government bonds with a maturity of 2 to 10 years barely hovering in positive territory on Friday after turning negative for the first time since October 10 earlier this week had become.
With a big week in labor market data ahead next week, one eye remains on the gradually cooling US employment situation, and futures still estimate a better than 50% chance that the Federal Reserve will make another move next month quarter point of the policy interest rate.
PARTY AND SHOPPING
Wall Street stock benchmarks were higher ahead of Friday’s shortened session, with eyes on retailers and price discounts amid traditional “Black Friday” spending.
There were mixed inflation pictures abroad, with the Japanese yen benefiting from the softer dollar by rising more than 1% on above-expected inflation figures in Tokyo.
The corresponding figures for the eurozone in November came back above the European Central Bank’s 2% target, but were in line with expectations.
French and German government bond yields both fell on Friday, with the spread between the two narrowing as signs of a compromise emerged in France’s budget battle.
French Prime Minister Michel Barnier on Thursday dropped plans to raise electricity taxes in his 2025 budget, giving in to far-right threats to topple the government unless he eases burdens on the working class.
However, the far-right National Rally warned that this concession was insufficient to prevent a vote of no confidence as early as next week.
Chinese shares outperformed earlier despite hopes for positive news from major business surveys released this weekend.
Key developments that should give more direction to US markets later on Friday:
*Chicago Business Survey in November, GDP revision in Canada for the third quarter
* European Central Bank Vice President Luis de Guindos speaks
* Bank of England publishes report on financial stability
(By Mike Dolan,; mike.dolan@thomsonreuters.com)
