By Randall W. Forsyth
Photograph by Nathan Boadle
The thing to worry about in global bond markets isn’t what the Bank of Japan is doing, but what’s happening to U.S. manufacturing.
U.S. bond yields plunged Tuesday morning after the Institute for Supply Management’s closely watched manufacturing index was reported to have plunged in September, to 47.8 from 49.2 in August. The gauge had been forecast to have recovered to above 50, the dividing line between expansion and contraction in the manufacturing sector.
Japanese bond yields jumped Tuesday after a weak auction of new securities, resulting from a change in the Bank of Japan’s bond-purchase operations. The sharp rise in Japanese government bond yields rippled through global sovereign debt markets. U.S. Treasury note yields surged more than five basis points (0.05 percentage points) for the benchmark 10-year maturity, to an intraday peak of 1.75%.
But then the 10-year yield plunged to 1.644%, down 2.3 basis points on the session. Even more worrying were components of the ISM report, which showed continued weakness in new orders, especially export orders, all of which reflect the continuing trade war.
What investors shouldn’t worry about is the uptick in Japanese government bond yields. Steven Ricchiuto, U.S. chief economist for Mizuho Securities, says the adjustment in the BoJ’s purchases was technical, but a sign of the central bank’s sensitivity to the plight of Japanese banks’ difficulties of operating in a negative interest-rate environment. The shift wasn’t a fundamental change by the central bank—it isn’t backing away from its longstanding policy of monetary stimulus, he emphasized.
But Ricchiuto expects Japanese investors to resume their “grab for yield” globally as they recognize Japan’s economy “isn’t getting any better.” With the increase in that nation’s value-added tax that took effect Tuesday—adding to the drag on the economy—he looks for investors to resume their bond buying.
In the U.S., attention turns to the rest of this week’s slate of economic data releases and how they may affect Federal Reserve policy. After the ISM report was released midmorning, the probability of a 25-basis-point cut in the federal funds target rate at the Oct. 30 policy meeting jumped to 58.3% from 39.6% as of Monday, according to the CMEFedWatch Tool.
Friday’s employment report will be the key report for the markets. Estimates for nonfarm payrolls have a median rise of 140,000, with average hourly earnings expected to be up 0.3% from a year earlier. Those projections are in line with recent trends. But surprise on the weak side, as seen in the ISM report, could further boost expectations for Fed rate cuts coming sooner.
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