Daily Commentary BY THE CURVE TEAM –

More Hikes Coming in the US While China Lowers Reserve Requirements

8th of October, 2018

The non-farm payrolls report and subsequent Fed comments saw bond rates rise again on Friday night while over the weekend the Chinese Central Bank took steps to bolster activity.

US unemployment is now at its lowest level since 1969 after it fell more than expected. Unemployment in the US now sits at 3.7% despite the jobs growth falling short of estimates. Wages were up 0.3% as expected, confirming the tightening of the labour market and need to raise rates.

The Fed’s current focus is getting the overnight Fed Funds Rate back to neutral given the strength in the overall economy. Both the Atlanta and NY Fed President’s said as much following the release of the latest employment data.

There is even the risk that the Fed is falling behind with a growing number of Fed members suggesting that the Fed Funds rate might need to go past neutral if the strength in the economy continues to build.

Data and Fed speak on Friday was enough to push long term interest rates up again with the US 10’s up to 3.23% and honing in on the next key resistance level. It it weren’t for the miss on the jobs growth number, rates could have gone even higher.

Where long term rates and the USD go over the months ahead with be critical to markets and the outlook globally. With more debt globally now then prior to the GFC, businesses, households and governments are going to feel every incremental move high as debt maturities start to build.

While on debt, the PBOC in China over the weekend cut the Reserve Requirement Ratio for some banks by up to 100bp. The move will inject up to 750 billion yuan into the banking system. The move comes as Chinese markets re-open after a week off.

It will be a massive week of local data ahead. Following the latest job ads report today the latest business survey will be released tomorrow. Then we will get the latest consumer sentiment report Wednesday and new lending data on Friday.

David Flanagan

Director - Interest Rate Markets