The rise in US Treasury yields continued last week, and into yesterday, as markets enter a critical ten-day period. For now, the bond market is looking past the October payrolls report, which is expected to be weak, focussing instead on the possibility of a second Trump term, strong underlying growth, and persistently large US budget deficits.
The terminal rate has risen back up to around 3.5%, with the S&P 500 at record highs. Current market pricing now implies around 130 basis points of Fed cuts for this cycle, but this remains too aggressive. There are tentative signs, that investors are beginning to balk at excessive fiscal deficits and starting to demand a premium for holding government bonds of longer duration. The latest rise in Treasury yields has coincided with an increase in the chances of Trump winning on November 5th, even with oil prices dipping lower again.
If the Fed cuts rates too far and too fast, it may eventually be forced to hike again in 2025. At the ECB, policymakers are split on the need for a 50-basis point cut in December, but calls for jumbo rate cuts have been overdone. Indeed, despite the plethora of weak survey data, the Eurozone labour market has been remarkably resilient in the face of higher interest rates and remains secularly tight.
As in the US, the Eurozone appears highly responsive to looser monetary policy. The October 2024 ECB bank lending survey was very strong. Net demand for housing loans rebounded strongly in Q3, with demand for housing loans expected to surge further in Q4. House prices were already turning up in Q2, and should follow higher in the coming quarters.
