October was a quick reappraisal of the odds of recession. After the excitement of the Fed 50bps jumbo cut in September, the market duly factored in a series of them. The jobs data at the beginning of the month was 100,000 over expectations, followed by higher-than-expected inflation data, and by mid-month, stronger retails sales. The culmination of all the data killed the rate cut party, taking out 50bps of Fed cuts from year end pricing. On the political side, momentum waned for Kamala Harris after some lacklustre interviews. Long end yields backed up roughly the same 50bps, as the Trump trades of higher inflation and deficits started to dominate in line with his odds of winning.
Shifting globally, the central banks of New Zealand and Canada cut rates by 50bps, along with a 25bps reduction by the ECB as slowing data in all three continued to surprise to the low side. In the UK, the first budget from Labour in 14 years was treated with much caution as reclassifications of debt worried watchdogs, commentators and credit ratings agencies alike. With memories still fresh from the “Trussmageddon” mini budget of summer 2022, bond markets are slowly but surely trying to find the pain threshold. 10y Gilt yields touched 4.5% and the spread widened to other G7 benchmarks, although the vigilantes seem to have stayed away for the time being. The month finished 5 days before the US voting day, with polls tied and the market largely hedged for the day and soon after. The potential problem will likely come if legal contesting of close voting suspends a result for many weeks, then there is a very real risk that the hedges expire before the volatility event is over.
The US 10y closed the month 51.2bps higher and 5s-30s swap was 11.1bps flatter.
