Dollar rides rising yields, Canada set to ease
A look at the day ahead in U.S. and global markets from Mike Dolan
The dollar continues to ride higher on the back of an anxious pre-election climb in U.S. Treasury yields, notching its best levels in almost three months against the euro and yen on starkly contrasting economic and interest rate pictures.
With the International Monetary Fund's annual meeting underway and G7 finance chiefs and central bankers gathering, the exceptional performance of the U.S. economy was underlined in updated IMF global forecasts on Tuesday.
The IMF revised its 2024 and 2025 U.S. GDP growth forecasts upward yet again - by two-tenths of a percentage point to 2.8% for this year and by three-tenths of a point to 2.2% for 2025.
While world growth forecasts at large have remained little changed, the U.S. GDP outlook for this year and next has now been lifted by a cumulative 0.7 and 0.5 points respectively since January. And only Canada among the G7 is expected to grow faster than the United States next year.
With U.S. economic surprise indexes at their most positive since April, this sort of backdrop partly explains the sharp rise in Treasury yields this month and the rising 'terminal rate' for Federal Reserve easing expectations.
The other driver of both Treasury yields and the dollar is the approach of Nov. 5's election, where betting markets now lean heavily toward a win for Republican Donald Trump despite some concerns about distortions and manipulation by small groups of deep-pocketed punters.
Trump's tax cuts and tariff plans, alongside rising speculation of a Republican clean sweep of Congress to boot, have unnerved investors about the implications for a U.S. budget deficit already at 6.4% of GDP as well as for domestic inflation and overseas growth.
With a 20-year bond auction in the wings on Wednesday, 10-year yields US10YT=RR hit their highest level since July and, at 4.24%, have now climbed 25 basis points in just a week. The New York Fed's estimate of a 10-year Treasury 'term premium' - a measure of compensation for risk investors demand to hold long-term debt - topped 20bps for the first time this year.
And yet, election bets may be just a little wary still of whiplash - not least given the dramatic change of fortunes and polling already seen over the summer.
Opinion polls still don't suggest any concrete outcome, the latest Reuters/IPSOS opinion poll tracker this week still puts Democrat Kamala Harris three points ahead nationally and other polling shows a dead heat in the swing states.
Still, beyond the election, the dollar picture at least is very much flattered by the interest rate outlook overseas.
The Bank of Canada is expected to cut its interest rates again later on Wednesday by up to 50bps.
And the euro EUR= was also hit on Wednesday by a Reuters sources story saying European Central Bank policymakers have begun to debate whether interest rates need to be lowered enough to start stimulating the economy.
That suggests ECB rates may well return below estimates of 'neutral' - currently estimated anywhere between 2% and 2.5% - and contrasts with rising assumptions of a U.S. 'terminal rate' around 3.5%.
The yen JPY=, meantime, continued to weaken past 152 per dollar for the first time since July ahead of the weekend election in Japan.
Ructions in the rates markets have sent a shot across the bow of lofty stock markets this week, with Wall Street indexes .SPX stalling on Tuesday and futures in the red again on Wednesday ahead of the bell.
The earnings season is reaching full throttle in the background, with Tesla TSLA.O, Boeing BA.N and IBM IBM.N topping a packed diary later today.
In Europe, Deutsche Bank shares DBKGn.DE fell back up to 3% after the German banking giant raised its loan-loss provisions forecast against the backdrop of a weak German economy - even as it returned to profit in the third quarter and cut reserves for investor lawsuits over its Postbank division.
And shares of McDonald's MCD.N fell nearly 6% in premarket trading after an E. coli outbreak linked to the restaurant chain's Quarter Pounder hamburgers resulted in the death of one person and sickened 49 people in the U.S.
Key developments that should provide more direction to U.S. markets later on Wednesday:
* Bank of Canada policy decision, news conference from governor Tiff Macklem
* US September existing home sales, Federal Reserve publishes Beige Book of economic conditions, euro zone October consumer confidence
* G7/G20 finance chiefs meet on at International Monetary Fund and World Bank Annual Meetings in Washington, including speaking engagements with Bank of Japan Governor Kazuo Ueda, Bank of England Governor Andrew Bailey, European Central Bank President Christine Lagarde and ECB chief economist Philip Lane, and German Finance Minister Christian Lindner
* Federal Reserve Board Governor Michelle Bowman, Richmond Fed President Thomas Barkin speak
* US corporate earnings: Tesla, Boeing, IBM, Ameriprise, Northern Trust, AT&T, Boston Scientific, General Dynamics, Thermo Fisher Scientific, Coca Cola, Nextera Energy, Hilton Worldwide, United Rentals, O'Reilly Automotive, Lam Research, Newmont, Las Vegas Sands, Rollins, Align Technology, CME etc
* US Treasury auctions $13 billion of 20-year bonds
IMF chart on world economic outlook https://tmsnrt.rs/4h9re2W
US economic surprises outstrip the world https://tmsnrt.rs/4dWrdg2
Harris vs. Trump: Reuters/Ipsos US presidential poll tracker https://reut.rs/4814CgV
Bank of Canada interest rates since the global financial crisis https://reut.rs/3BOhFq4
Deutsche Bank returns to profit https://reut.rs/4hgX1iE
(By Mike Dolan,
mike.dolan@thomsonreuters.com)
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