Global daily insight 12 october 2016

Daily Insight

Group Economics Macro & Financial Markets Research

12 October 2016

US Treasury yields rise on Fed expectations Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

US Government Bonds: Fed re-pricing pushing up yields – US Treasury yields continued their rise on Monday. 10-Y yields reached 1.75% at time of writing, with yields up by around 3 bp across the curve. This is a continuation of the upward trend seen since the end of last month, with 10-y yields up by around 20bp from their lows on 27 September. On that date, futures markets priced in around a 50% chance of a December rate hike, while the implied probability currently stands at close to 70%. The tone of Fed officials has been on the hawkish side. Early on Monday morning (4 CET), Federal Reserve of Chicago President Charles Evans continued the trend saying ‘a December move could be fine’. Mr Evans’ comments are significant, as although he is not currently a voting member, he is on the dovish end of the FOMC spectrum. Still, we do not think there is too much room for US 10y yields to rise further. Admittedly, there is some re-pricing of Fed rate hike expectations still on the cards in our view as we expect a December rate hike, and two rate hikes next year. On the other hand, risks to our views are to the downside, while 10y yields do tend to peak relatively early in the rate hike cycle. In addition, other central banks – such as the ECB and BoJ – will continue QE in the coming months, which could have some depressing impact on US yields. Finally, we expect US economic growth to remain moderate. (Nick Kounis) US Macro: Tighter labour market makes hiring more difficult - September’s NFIB small business optimism survey, edged down to 94.1 from 94.4 the previous month. Although small business owners said they expected the economy to improve and that it was a good time to expand, they also planned to increase inventories and expected a deterioration of credit conditions. Business owners said they also had a difficult time finding qualified candidates to hire. Meanwhile, the Federal Reserve’s labour market conditions index (LMCI), which includes 19 indicators, to a large extent included in the labour market report published by the Bureau of Labour Statistics, showed that conditions contracted in September, for the second month in a row. This index has a high correlation with the nonfarm payrolls, which continues to show moderate job gains, but has been slowing down in the past couple of months. At the same time the unemployment rate, which also has a strong correlation with this metric, edged up in September. This could be putting further downward pressure on the LMCI. We think that a tighter labour market is making it more difficult to find qualified workers. This may explain the slowdown in hiring in the recent months. Meanwhile the slightly higher unemployment rate is the result of new workers entering the labour market. High labour supply should continue to prevent the labour market from getting much tighter. (Maritza Cabezas) Euro Macro: Germany’s ZEW sentiment remains subdued despite stronger data Germany’s ZEW economic sentiment indicator increased from 0.5 in September to 6.2 in October. Given the historical pattern in the series, which tends to jump up and down by 10 to 20 points on a monthly basis, this is only a modest increase. Besides, sentiment is still below its long-term average value of 24. This reflects that the participants to the survey still

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Daily Insight - US Treasury yields rise on Fed expectations - 12 October 2016

see a lot of risks surrounding the German economy during the next six months. Indeed, the details of the report show that the expectations for the economy of the UK stabilised at a very low level of -56.8 (balance of ‘improve’ and ‘get worse’). Worries about Deutsche Bank and the eurozone financial sector more generally, as well as political risks and the rise of Euroscepticism probably weighed on sentiment as well. Meanwhile, recent hard economic data for Germany, such as industrial production and exports have jumped higher in August after they disappointed in July. We expect the German economy to expand at a rate of around 0.3-0.4% qoq in both Q3 and Q4 of this year, which is similar to growth in Q2. (Aline Schuiling)

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Daily Insight - US Treasury yields rise on Fed expectations - 12 October 2016