Mid-Week Update

October 18, 2023

A quick update on the recent market moves and anything that might have changed on either the momentum or reversal model.

The bond market sell-off continues, with 10-year yields back at the recent highs, looking like eyeing up a move to the 5%-handle.

The reason for the recent continued battering was the 0.7% increase in headline retail sales in September, which was much better than the consensus expectation of a 0.3% rise and some forecast (see ATW from Monday), which was based on the weakness of the near real-time card transaction data. There were also upward revisions to previous months' gains, which means that even adjusting for inflation, retail sales appear to be on a renewed upward trend and on a much stronger path than pre-pandemic trends would imply.

The market still has roughly a 50% probability for the Fed to hike once more this year, while the market has now priced out quite a chunk of rate cuts next year, with 65 bps worth of cuts still in the curve.

There was also a relatively hawkish news combo that hit late in the Asia day on Tuesday. Bloomberg reported that the BoJ will consider raising inflation forecasts for 2023 and 2024 at the October 31 meeting, which comes on the heels of an NHK story that Japan’s largest labour union will push for even larger 2024 wage increases than last year. The hawkish double-whammy did little to move USDJPY, which remains beholden to US real yields and jammed against MoF's suspected 'pain point' at 150. Meanwhile, the JPY 10y swap marched 4bps higher back to 1%.

Now, let’s look at our charts and what we should focus on.