The last two weeks have seen significant turbulence in the bond market, which has experienced a downward trend following key economic data releases. With the upcoming Federal Reserve (Fed) and European Central Bank (ECB) meetings on the horizon, it’s crucial to unpack what the recent economic indicators tell us about the future direction of monetary policy.

Just two weeks ago, the bond market was enjoying strong performance, but recent data has shifted the landscape dramatically. Since October 1st, the Bund has declined nearly 300 basis points, dropping from 136.10 to 134.18 by October 4th. This downward trajectory has been influenced by multiple factors, with the most significant being U.S. economic data releases.

Bund trajectory since September 30th

Source: Bloomberg, InterCapital

NFP print came in shockingly high with market forecasting that the US will have added about 140k new jobs in September, but as you surely know, data came in above anyone’s expectation and the reading was 254k. The main sectors that contributed to such high print were food and drinking services, health care, and government. This is the first in a series of data that shows how tricky and bumpy this last stage of the inflation marathon is going to be.

The following data release came last Thursday when we had US CPI which came in at +0.18% MoM (vs. +0.1% expected), or +2.4% YoY (vs. +2.3% expected). Furthermore, we had a core CPI number, which came in at +0.31% MoM (vs. +0.2 expected), pushing the year-on-year number up to 3.3% (vs. +3.2% expected).

Going on to the Friday when we welcomed the latest US Producer Price Index, and the print for PPI Final Demand (MoM) came in slightly lower than anticipated at 0.0% (vs. +0.1% expected); +1.6% YoY (vs. +1.8% expected). The details of the CPI report indicate that only a part of the strength in the CPI will feed through to the core PCE deflator (the Fed’s preferred inflation gauge). While strength in components such as apparel, vehicles, and education will feed through to the deflator, strength in airfares, motor vehicle insurance and medical care services such as physicians fees will not.

The FOMC minutes released last Wednesday highlighted a divided sentiment among officials regarding rate cuts. While some favoured a 25bp cut to signal a clearer path for policy normalization, the decision ultimately fell to a half-point cut. This mixed sentiment certainly added to existing fears that the battle against inflation has not yet reached its final stage, and it raised a question of whether the Fed could pause on the rate cut at their next meeting. Surely, FOMC members will not be having an easy time in the next few weeks until their next meeting on November 7th, just a couple of days after election day. Some Fed officials stated how they would feel comfortable skipping a rate cut at their next meeting, however, that almost certainly won’t be happening as there has been no change in the Fed’s rhetoric and market’s cut pricing, so the base case is still a 25bp cut.

As we approach the ECB’s meeting this Thursday, expectations are similarly set for a 25bp cut. Given the current market conditions and the ECB’s commitment to addressing inflation, significant surprises are unlikely.