How high will bond yields go and will the Fed hike in October? The key questions for markets in the week ahead

Global bond yields continue to set fresh multi-year highs but stocks are so far holding up ok. For the year the FTSE 100 has risen 5% while the S&P 500 has gained 12% YTD and Q4 is usually the strongest period of the year. As October kicks markets face a test of strength as spiking bond yields are about to meet earnings and the US mid-terms.

Here’s the key things to watch over the next week.

FOMC minutes: How early could the next hike come?

Inflation pressures are sending central banks into tightening mode. The Fed raised rates by 25bps in September for the first time in three years and minutes from that meeting to be released on Wednesday could detail a lot more about the Fed’s reaction function and what might trigger a follow-up hike in October. Wednesday's softer-than-expected PCE inflation saw markets pare bets for a hike this month to about 20% from 65% just a week before, while the softer-than-expected nonfarm payrolls report on Friday nudged that down to 15%. 

Bonds: How long can the long end go?

Picking up nickels: Bond investing is a bit like picking up nickels in front of a steamroller. Small, steady and dependable gains but always the risk you get squished. The rout in sovereign bonds continued over the last week, with US 10yr yields rising to its highest since 2002above 5.34% and the UK 30yr yield above 6% for its highest since 1998. Yields cooled a bit late Thursday into Friday before the relatively light nonfarm payrolls signal pushed the 10yr down to 5.17%. The question for investors is whether this blowout in yields continues or if the top is in. Economic data is a bit thin on the ground this week, but this is more about the market trying to find its equilibrium and investors seem way of running in front of this steamroller for the time being.

Will France pass its draft budget?

France’s Fiscal Fragility is emerging as the key theme for eurozone debt markets. Specifically, the blowout in Franco-German yields will have officials at the ECB very worried, particularly as it’s now showing signs of contagion hitting Italian-German spreads. A budget proposal will cap France’s deficit at 5% next year, from 6.5% if nothing is done. But it must pass the parliament and risks being watered down. The move in French bond yields and spreads shows the market does not have faith the government will carry out the required fiscal reform. The market is also exacting risk premia ahead of the presidential election next year. The budget bills must be formally filed at the National Assembly by 6 October, with the debate scheduled to begin on 13 October., after which it has 70 days to pass the bill.

Can the Conservatives steal back some momentum from Labour?

The Labour party has made all running of late, riding high on (still, just) new leader Andy Burnham’s folksy charm and his offer to reinvigorate the state. It might not be fully costed and the Budget is just a few weeks away, but he’s stealing the narrative. With Reform UK going through some problems, Labour steadily risen up the polls to match Nigel Farage’s party on 24%, pushing the Tories into third place on 19%. So can the Conservatives make a splash at its conference in Birmingham, which kicks off Sunday?

Are earnings going to keep pace with lofty expectations?

Applied Digital, PepsiCo and Delta Air Lines are among the few large companies due to post third-quarter results next week, marking the unofficial start of earnings season on Wall Street before the big banks kickstart the reporting season proper the week later. Earnings across the S&P 500 are set to rise 30% in the third quarter, according to estimates. We’ll be paying close attention to Applied Digital as the semiconductor equipment maker will provide a read on the AI demand picture.

Can Tesco interim results match expectations?

Tesco heads into Thursday’s interim results off the back of a soft first quarter, when like-for-like sales growth hit just 1.0%. However there are clear signs of a pickup in momentum with first-half revenues seen rising +3.1% (+2.6% in Q1). Look to recent market share gains translating to improved LFL sales, a better performance from wholesale business Booker in Q2 after LFL sales fell –3.2% in the first quarter, online and Clubcard progress and whether the higher-end Finest range can continue to grow at the +9% level we saw last quarter. Shares are up around +7% YTD to 472p, with Morgan Stanley among the bulls saying the should hit 550p.

ISM services PMI: Just how hot is the US economy running?

Monday starts with another reading showing the strength of the US economy with the ISM services PMI survey. September's US ISM Manufacturing survey came in slightly weaker than expected on the headline index at 54.5,but still pointed to solid expansion.  A week ago, a separate PMI series rekindled the bonfire in the bond market, with the latest S&P services and manufacturing activity surveys hit 5-year highs.

What do the central bankers have to say?

Tuesday see a heavy slate of central bank speakers offering a read into how they are assessing the inflation and bond yield drama. Fed Vice Chair Michelle Bowman, New York Fed President John Williams and Dallas Fed President Lorie Logan are in action.  ECB Governing Council member Olli Rehn holds a press briefing in Helsinki on the euro-area economic outlook, Bank of England rate-setter Catherine Mann speaks at the TS Lombard Capital Markets Summit in London. The most attention, however, may be on BOJ Governor Kazuo Ueda as traders look to how far the central bank wants to tighten policy rates.

On Thursday we hear from St. Louis Fed President Alberto Musalem and Minneapolis Fed President Neel Kashkari, while ECB Chief Economist Philip Lane speaks at Societe Generale’s Global Markets Conference in London. There’s a strong showing from the Bank of England with rate setters Clare Lombardelli, Huw Pill and Megan Greene all in action.
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Will oil prices reflect actual crude flows again?

There seems to be no signs of resolving the conflict in the Middle East. President Trump believes Iran "is ready to fold up, "and that the US will win the war "right after the election”. That doesn’t seem to matter too much for crude oil flows. Data from Goldman Sachs, JPMorgan and Kpler indicate oil transiting the Strait of Hormuz at a seven-day average of 13.5 million bpd, back to pre-war levels. Kpler data also shows the 7-day moving average of crude flows out of the Middle East region as a whole could be as high as 20mn bpd, compared with a pre-war average of 18mn bpd. Yet crude prices remain stubbornly high – markets are pricing in the risk of further escalation, while inventories are low, incentivising restocking given the escalation risks.

Lula vs Bolsonaro: who will win Brazil’s elections?

Brazil holds the first round of its presidential election, with left-wing President Luiz Inacio Lula da Silva seeking another term. Polls indicate he is tied neck and neck with the right-wing Flavio Bolsonaro meaning it’s likely to progress to a second-round runoff vote, scheduled for 25 October.