Treasury Market Commentary

The US Federal Reserve (the Fed) and the Bank of England (BoE) opted to leave interest rates unchanged at their policy meetings last week, as did the European Central Bank (ECB) the week before. Market focus has now shifted from where interest rates around the world will peak to how long they will remain at the current level.

The Fed paused for a second month in a row, with chair Jerome Powell indicating it would tread ‘carefully’ in light of the recent rise in Treasury bond yields (these had provided a form of monetary tightening). In a further sign that markets consider US rates to have peaked, yields fell throughout the week: moves lower were supported by a drop in the ISM Manufacturing Index and weaker-than-expected employment figures.

According to statistics released on Friday,150,000 jobs were created in the US in October (180,000 were expected), while the September number was revised down from 336,000 to 297,000. With the unemployment rate ticking up from 3.8% to 3.9%, this potential softening in the labour market further supports the Fed’s decision to stand still on rates.

In the UK, the BoE left rates unchanged at 5.25% for the second meeting in a row. This followed 14 consecutive interest-rate hikes running from December 2021 to the final 0.25% increase in August. Most policymakers now appear to believe rates will stay higher for longer, following the ‘Table Mountain’ profile described by BoE chief economist Huw Pill last month. While the next shift is likely to be a move lower, BoE governor Andrew Bailey cautioned it is “much too early to be thinking about rate cuts”.

GBP/USD

In the UK, the main data point for the week ahead is the preliminary release, on Friday, of third-quarter Gross Domestic Product (GDP) figures.  Following the 0.2% increase recorded in the second quarter, markets expect to see a contraction of 0.1% (quarter-on-quarter) in September.

This contraction signals potential recession in the UK, and the BoE has indeed revised down its projections for the next couple of years: in a scenario where interest rates remain at 5.25%, it envisages the economy contracting every quarter in 2024.

Few data releases of note are expected from the US, but Fed policymakers will be out in force and, as in the UK, markets will be looking for guidance as to how long rates are likely to remain elevated.

After trading relatively sideways, the pound enjoyed a strong performance versus the US dollar on Friday, gaining 1.45% to close the week at 1.2380. Against the euro, the pound gained 0.55%, closing the week at 1.1539.

Finally, the Reserve Bank of Australia (RBA) meets tomorrow, with market expectation swinging between a pause and a 0.25% hike. Recent inflation data has surprised to the upside in Australia, leaving the RBA with a fine balancing act to manage.

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