Morning Bid: October doubts

By Mike Dolan

Sept 30 (Reuters) - On the last day of a ‌brutal third quarter for bonds, ​a few questions ​have emerged about the now overwhelmingly hawkish interest rate outlook.

Even though Treasury yields continued to climb on Tuesday, with the long bond yield hitting its highest point since 2002, US consumer confidence readings plunged to their lowest level since 2014 this month as August job openings also fell more than ‌forecast.

There were qualifiers and questions in those releases, of course, with rising inflation expectations and stable readings on layoffs. But then New ⁠York Federal Reserve boss John Williams cast doubt on market pricing that sees another Fed hike in October as odds-on.

Williams said further tightening may be necessary by year-end but that the Fed may need time to ‌gather more data before pulling the trigger again.

The ‌fact that bonds didn't react significantly to any of the above, nor to a more than 2% drop in crude oil prices yesterday, may be a worrying sign about market dynamics. But it may also be partly related to portfolio rebalancing at quarter-end, and we may need to see the fourth quarter underway for a clearer ​picture.

As it stands, the whopping 82-basis-point leap in 10-year Treasury yields in Q3 is the biggest quarterly jump in four years.

Wednesday offers up the August PCE inflation update and ADP's private sector jobs readout for September, while tech stocks will look to chipmaker Micron Technology's earnings release later in the day.

A close eye will also be ⁠on the pumped-up dollar, which has gained sharply this month on the back of the unfolding Fed tightening picture and as European Central Bank officials started to talk of a more "measured" policy stance after a series of rate hikes ​there.

Elsewhere, Chinese business surveys for September perked up, returning to expansion mode on the back of AI-related activity and government support.

Reports have also emerged about worrying developments in one of China's leading AI models, Moonshot, with safety concerns now rife across the global ​AI space.

And in Britain, Prime Minister Andy Burnham's annual conference speech to his governing Labour Party indicated ‌changes to pensions and social care policies in the years ahead - and also left open all options for rebuilding relations with the European Union, possibly even as far as rejoining the bloc.

Chart of the day

A torrid quarter for oil prices and bond markets comes to ⁠an end on Wednesday. This month's interest rate rise from the Fed flew in the face of many long-held assumptions about the central bank outlook under the new leadership of Trump appointee Kevin Warsh.

This shift in rate expectations helped fuel a surge of more than 80 basis points in Treasury's 10-year borrowing rate during the quarter - the biggest quarterly rise in four years. But as GDP growth ⁠and corporate earnings projections for Q3 picked up in tandem, AI-fueled stock markets managed to deflect the bond squeeze.

However, as the quarter draws to a close, there are some indications that the road ​ahead - with almost four Fed hikes priced into the futures market over the coming year - may not be all one-way traffic. New York Fed boss John Williams reckons the Fed may pass on another hike next month, just as consumer confidence and job openings appear to slide.

Today's events to watch

• US August PCE inflation data (8:30 a.m. EDT), September ADP private payrolls (8:15 a.m. EDT), final Q2 GDP (8:30 ‌a.m. EDT)

• Fed's Lisa Cook and regional Fed presidents Thomas Barkin, Austan Goolsbee and Neel Kashkari all speak

Before you go, check out my latest column on how soaring defence spending could give the AI investment boom a run for its money and what the ‌convergence of the two means for restive bond markets.

And listen to the latest episode of the Morning Bid daily podcast, where we discuss the uncertain Fed outlook heading into Q4. Subscribe to hear Reuters ⁠journalists discuss the biggest news in markets and finance.

Want to receive the ‌Morning Bid in your inbox every weekday morning? Sign ​up for the newsletter here. You can find ROI on the Reuters website, and you can follow us on LinkedIn and X.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and ‌freedom from bias.

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