Bond market relief may prove short-lived
Investors absorbed the most recent $39 billion 10-year note sale and $22 billion 30-year bond sale without difficulty, which helped push the 10-year Treasury yield back down to 5.24% after it had climbed as high as 5.364%. Those auctions demonstrate that buyers will step in when yields are attractive, yet they say nothing about whether inflation or budget worries have been resolved. Should next week's figures reveal another acceleration in consumer prices, the recent decline in yields might unwind quickly, renewing strain on equities and other rate-sensitive assets.[S1]
According to the minutes from September's FOMC meeting, a majority of officials considered one more rate rise before the year ends to be warranted, even though they disagreed about the rationale and the timing. Some continued to worry that inflation is proving sticky, while others saw an additional increase as insurance against a fresh price shock. Momentum in the labour market is fading, but that alone probably will not alter the Fed's path. A milder CPI reading would let officials afford to wait; a stronger one would make a December move harder for markets to ignore.[S1]
Services prices keep the Fed on alert
The US ISM Services PMI eased to 54.9 from 55.4, below the 55.1 consensus. While the headline points to a slight loss of momentum, the Prices Index moved in the opposite direction, rising to 74, the highest reading since 2022. That leaves the Fed in an uncomfortable position: activity is cooling only gradually, yet firms keep reporting substantial cost pressures. Should those costs be passed through to consumers, it becomes much harder to argue against keeping interest rates elevated.[S1]
French fiscal strain weighs on the euro
The euro dropped to its weakest level in 17 months as worries about France's public finances mounted. Government debt now stands at roughly 119% of GDP, and the gap between 10-year French and German yields has stretched to about 135–140 basis points. That wider spread shows investors are demanding greater compensation to hold French paper. It also complicates the government's efforts, since costlier borrowing makes deficit reduction harder. For the euro, fiscal uncertainty combined with soft demand and high energy prices leaves little scope for a straightforward rebound.[S1]
Diesel prices in Europe hit a record €2.24 per litre, triggering plans to release emergency fuel reserves. Donald Trump stated that the US would not strike Iran before November's midterm elections, and Vladimir Putin voiced backing for attempts to bring the conflict to an end. Those remarks may calm immediate fears of escalation, but they do not eliminate the danger of supply interruptions. Should energy costs stay elevated, inflation may prove stickier even as economic activity loses steam.[S1]
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What to watch next week
UK annual retail-sales growth is projected to pick up from 0.5% to 0.8%, while monthly GDP growth is seen slowing from 0.5% to 0.1%. Firmer sales might give sterling a modest lift, but the more important issue is whether households are actually spending more after adjusting for inflation. If growth cools while price pressures persist, the Bank of England will have less scope to loosen policy without risking another acceleration in prices.[S1]
The RBA minutes ought to shed more light on the reasoning behind the reported lift in the cash rate to 4.60%. The unemployment rate is forecast to hold at 4.6%. A resilient jobs market would keep the prospect of additional tightening on the table, whereas evidence of deterioration would bolster the case for leaving rates unchanged.[S1]
US headline inflation is projected to climb from 3.4% to 3.6% year-on-year, with monthly CPI quickening from 0.4% to 0.6%. Core CPI is seen slowing to 0.2% month-on-month, though its annual pace is expected to nudge up from 2.4% to 2.5%. What drives the number matters more than the headline itself. If energy accounts for the pickup while monthly core inflation moderates, the Fed may be able to see through part of it. If core prices also heat up, investors will have greater cause to price another rate rise, pushing Treasury yields and the dollar higher again.[S1]
Producer prices are forecast to increase 0.5% month-on-month, up from 0.4%, while retail-sales growth is expected to decelerate from 1.2% to 0.1% monthly and from 6.0% to 5.2% annually. A firmer PPI reading would imply that cost pressures have yet to subside. Weaker sales would signal that consumers are turning more cautious. If both appear at once, the Fed confronts a tough dilemma: inflation is still too strong to disregard, yet demand may already be softening under the burden of higher prices and borrowing costs.[S1]
