ECB plays down rate hike scenario but euro flies to fresh session highs – US Open Note

Global flattening of yield curves

A flattening of global bond yield curves gained momentum on Thursday, ratcheting concerns about the pace of economic growth as more central banks start to signal higher interest rates in the foreseeable future amid the persisting inflationary pressures.

Specifically, the 2-year Treasury yield climbed to the highest since March 2020 on Wednesday, narrowing the gap with the 10-year yield, while the Canadian and Australian equivalents marked a multi-year daily increase following the hawkish rate statement from Bank of Canada on Wednesday and the RBA’s surprising decision not to buy April’s 2024 government bonds today.

The narrowing spread between the shorter and longer-term bond yields brought some risk-off into play, adding some support under the safe-haven gold, which continues to fight for a close above the $1,800 level despite the pickup above the 200-day simple moving average (SMA).

US data mixed

Speaking about growth, US GDP figures (annualized) missed expectations of a 2.7% expansion in the third quarter, reflecting a weaker growth of 2.0% instead. The reading is also way below the 6.7% number registered in the previous quarter, though fading base effects are probably the key technical driver for that weakness.

In positive news, initial jobless claims for the week ending Oct.23 beat forecasts once again, posting a fresh post-pandemic low at 280k versus 290k previously. The continuing claims, which are a better proxy for the unemployment rate, also retreated to new lows, raising speculation that next week’s nonfarm payrolls may bring some good news about the US labor market.

Dollar/yen reacted little to the aforementioned data, remaining stable around 113.65. Dollar/loonie and aussie/dollar were muted as well at 1.2365 and 0.7512 respectively.

Apple, Amazon Q3 earnings, Biden’s Capitol Hill visit in focus 

Wall Street kicked off the day with moderate gains, with the S&P 500 recouping yesterday’s declines. The earnings season will feature Q3 releases from Apple and Amazon after the market close, therefore some volatility could pop up on Friday.

Prior to that, developments around Biden’s spending plan may attract special attention at the Capitol Hill today as the US President is planning to announce that a budget of $1.75 trillion has been secured ahead of the G20 summit, including a minimum tax on corporate profits, higher income taxes on the very wealthy, and a 1% surcharge on stock buybacks.

On Wednesday, the battle took another setback after Kyrsten Sinema, a moderate Democrat, opposed the proposal, making a deadline at the end of October difficult to be met.

ECB pushes back rate hike expectations

Meanwhile in the Eurozone, the intensifying energy crisis was not enough to change the ECB’s mindset on inflation. The central bank kept its policy settings steady as widely expected, with Christine Lagarde reiterating during her press conference that temporary factors are still behind the sharp price pressures, although those could last longer than initially expected but eventually evaporate in the medium term.

In other important notes, the ECB chief also downplayed the market pricing of a minor rate hike at the end of 2022, while confirming that the pandemic led PEPP bond program will officially end in March.

Despite her conservative tone, euro/dollar spiked to an intra-day high of 1.1644, bringing the 200-period SMA on the four-hour chart into scope. Euro/yen accelerated towards the key 132.16 resistance, while euro/pound gained a softer share of gains to trade at 0.8460.

In stock markets, the pan-European STOXX 600 index did not face any volatility from the ECB policy meeting, but steep losses in the energy sector are keeping the index in the negative area.

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