The markets have the blues

general decline in equity markets and a dramatic drop in long-term bond yields yesterday in the wake of oil prices. It is also likely that the strong demand at an auction for a 5-year US Treasury bond triggered a short squeeze forcing many traders to hastily buy back their short positions. The 10-year rate is at 1.53% compared to 1.70% last Thursday. The approaching central bank meetings (ECB today, Fed and Bank of England next week) and a very busy economic calendar (US Q3 GDP today, Eurozone GDP and inflation tomorrow) threaten to reveal a reality that the markets have refused to face: growth is slowing, but inflation is accelerating, forcing central banks to hurry up their policy normalization.

Yet the ECB should be the counter-example, with Ms. Lagarde making efforts to reassure the markets that accommodative policy will continue. At the same time nevertheless, inflation is expected to rise to 4.5% in Germany in October and the rather expansionary budget unveiled by the British Chancellor of the Exchequer yesterday has reinforced expectations of a rate hike by the Bank of England. The consensus forecast for US GDP growth appears high at 2.6% based on our own estimates and those of the Atlanta Fed (see the graph below).

Energy scan economics news

The EUR/USD exchange rate continues to yo-yo around 1.16.

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