Oct 10 / Victor Arduin

Macroeconomics Weekly Report - 2023 10 16

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"Expectations of an additional interest rate hike by the Fed in November are supporting the US Treasury market, with yields rising to their highest levels in a decade. US Treasury bonds still have room to appreciate as more economic data is released and indicates that inflation will remain elevated."

The yield on US Treasury bonds reaches ten-year highs

  • US Treasury yields continue to rise to the highest levels in a decade, supported by strong labor market data and higher revisions to past numbers.
  • Higher interest rates are pressuring the US stock market and commodities. Investors are flocking to US Treasury bonds, which are becoming increasingly attractive in the face of a still complex inflationary environment.
  • Meanwhile, the US House of Representatives passed a bill extending government funding for 45 days, allowing the Fed to have access to economic data until its next meeting on November 1.


The labor market in the US remains strong, raising concerns about the pace of improvement in the country's inflationary environment, as the total inflation index rose again in its latest reading, also driven by higher energy costs.

The labor market in the United States continued to grow in September, with the creation of 336,000 jobs, almost double market expectations. Despite this, the good news is that wage growth is stabilizing, with an average increase of 0.2% per hour of work (4.2% increase on a year-on-year basis).

Those numbers are especially important for defining the path of interest rates in the US, as they are used in conjunction with other indicators, such as the consumer price index (CPI), to measure economic activity and inflation. A very strong labor market indicates an expansion of consumer demand, which can lead to higher prices.

Although there is some disagreement among monetary authorities about a new interest rate hike by the end of the year, there seems to be a consensus that interest rates need to remain elevated for “longer than desired”.

Therefore, the market is paying attention to economic indicators to predict the Fed's decision on November 1, and the latest US jobs report has increased the chances of a new increase in the interest rate.

Image 1: Non-Farm Payrolls in the US

Source: United States Bureau of Labor Statistics

US Treasury bonds continue to rise

Expectations of an additional interest rate hike by the Fed in November are supporting the US Treasury market, with yields rising to their highest levels in a decade. US Treasury bonds still have room to appreciate as more economic data is released and indicates that inflation will remain elevated.

Although the latest inflation report showed a worsening, due to the energy component, the core inflation continues to fall. However, a more robust labor market, predicating an expansion of the American economy, should reduce the pace of improvement in the country's inflationary scenario.

Image 2: Yield on US Treasury Bonds (%)

Source: Bloomberg

The latest European Central Bank's monthly credit data reveals that the drag on spending caused by reduced credit provision is now considerably more pronounced than it was during the depths of the Euro crisis. As a result, the risk of economic contraction in the latter half of the year is on the rise.

The credit impulse for households and non-financial corporations within the Eurozone declined to -5.2% of GDP in August, down from -3.7% in July. This shift lowered the three-month average to -3.9% from -2.9%. M3 money supply growth fell below the consensus forecast, declining to -1.3% year over year from the previous month's -0.4%. These figures contrast with the median estimate of -1.0%.

Image 3: EU PMIs

Source: Refinitiv

In Summary

Payroll data came in almost double what was expected in its latest release, generating uncertainty about the inflationary trajectory for the rest of the year. A robust labor market as it is now should bring a stronger expansion of economic activity, which could put pressure on inflation.

This possibility continues to be absorbed by the market, which is positioning itself as more economic data is released and seeking to anticipate a possible interest rate hike in November, which brings an upward sentiment to the yields of US Treasury bonds.
In this sense, the recent approval of a bill by the US House of Representatives allows the financing of federal institutions for an additional 45 days, averting the risk of not publishing economic indicators and allowing more data to reach the public and, in particular, the Fed.

Meanwhile, emerging countries, in particular Brazil, continue to see a depreciation movement due to the external situation that points to a decrease in the interest rate differential paid between their currencies and the dollar.

Weekly Report — Macro

Written by Victor Arduin
Reviewed by Alef Dias


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