US rates are leading again in global rate markets, and the focus is back on a cooling jobs market. The ADP numbers came in softer than hoped and retail sales for December stayed flat, suggesting the consumer is not helping growth. The more downbeat economic outlook flattened the back end of the curve, with 30Y UST yields some 7bp lower. On Wednesday, we have the delayed US payrolls data, which could again challenge market positioning. Government officials over the past few days have warned that one should expect lower jobs numbers going forward, adding to the shift in sentiment. A worsening US macro outlook does not, however, seem to faze equities and the S&P 500 keeps hugging record highs. Once again, we’re reminded of the K-shaped economy, whereby strong gains in AI are in stark contrast with the worsening picture for middle and lower-income Americans.
This time, EUR rates followed the bullish move in US Treasuries which has taken the 10y Bund yield to the very low end of this year’s range at 2.8%. But overall the correlation remains weak between the two markets. The eurozone is still facing an improving growth path with more fiscal stimulus ahead. Inflation is at target, but with some concerns about undershooting. Meanwhile, the US faces a cooling economy, but inflation is still on the hot side. These different narratives reduce the spillovers from the usual macro data releases.
The spillovers from the US to euro rates are strongest when risk sentiment is involved, which still seems a tad fragile. Markets are turning more wary about the level of AI investments. Although having said that, so far the NASDAQ is also still close to this year’s record highs. If the macro picture keeps deteriorating, we might even have a situation where the Fed cuts more than anticipated, which could actually benefit tech stocks and keep the positive mood music going. Therefore, a large equity correction is not our baseline but nevertheless something that could make a bullish case for global bond markets.