Long-term real rates moving against US

Have risen by more in Eurozone

Chart of the Day

The Fed’s tapering hint has received a lot of attention, but stepping back shows that long-term real rates - those for 2026-2030 in the chart above - have risen by more in the eurozone than the US in recent months. They are still much higher in the US, but it is that rate of change that matters most for markets. In that respect, it might appear somewhat unusual that the USD has been on a strong run lately, but this adds to the evidence that the strength of the USD is probably a reflection of global growth concerns as much as anything else.

Macro

Jobless claims are still higher than in September even though they fell sharply last week - this means lots of people are still losing work, far more than is usual.

German industrial production growth fell sharply by 4.0% MoM in August due to supply disruptions. The annual growth rate was positive but only due to favorable base effects.

UK house price inflation according to the Halifax measure accelerated to 7.4% in September - low by US standards where it has been closer to 20%.

Markets

Bond yields in Canada have almost caught up with those in the US - the central bank governor did a speech yesterday and his comments were interpreted as hawkish.

The 10Y-2Y yield spread has risen by the most in Canada in recent weeks, as traders bet on higher rates in the years ahead.

5-year/5-year inflation swaps in the US are approaching a multi-year high, and those in the euro-zone have already risen to the highest in years, as investors lose faith that all this inflation really is transitory.

The relationship between real rates and EURUSD is not great, but there’s not much from recent moves to suggest the euro should fall much further.

The UK 12-month overnight index swap is currently 0.37%, i.e. above the policy rate of 0.10%, as investors now think the BoE will hike next year.

It was another strong day for lumber, which is now up by 30.6% in the past month - trading like a cryptocurrency again.

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