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US bond yields surge past 5% as interest rates fears drive market trends

Last week, US bond yields surpassed 5%, jumping 30 points in just a week. This week, interest rate concerns are poised to remain the primary driver of market dynamics, with significant contributions from tech giants such as Amazon, Meta, and Alphabet.

In Australia, the focal points will revolve around interest rates and inflation, particularly where they intersect with the release of inflation data on Wednesday. Michelle Bullock, the new RBA governor, is scheduled to make two public appearances and provide commentaries this week, one on Tuesday and another on Friday, preceding the central bank’s meeting next week.

On a global scale (excluding China), early figures from the monthly manufacturing and service sector activity surveys are expected for major economies, led by the US, Europe, Japan, Australia, and other Asian countries.

Central banks in Canada and Europe are set to meet and are widely expected to maintain unchanged interest rates throughout the week.

Starting with the US, the month will witness the release of the PCE economic data, covering consumer incomes, spending, and particularly inflation—the preferred measure of the Fed. However, two other data releases will carry equal significance: the initial estimate of US economic growth for the third quarter of September and weekly figures on initial unemployment benefit claims.

Beginning with the latter, last week’s initial claims figures plummeted to a 9-month low of 198,000, surprising economists, analysts, and undoubtedly the Fed. Should this trend continue with another low number this Thursday, it will intensify discussions of an impending rate hike in advance of the Fed meeting starting next Tuesday.

On the same day as the claims data release, the first estimate of US third-quarter growth will be unveiled, with estimates projecting robust figures. AMP’s chief economist, Shane Oliver, anticipates annual growth around 4.1%, nearly double the second quarter’s 2.1%, driven primarily by strong consumer spending and business investment. Moody’s economists project a growth rate of 3.8% for the initial estimate.

Additionally, the US third-quarter earnings season is set to accelerate with 160 S&P 500 companies preparing to report.

In North America, the Bank of Canada is widely expected to maintain its key interest rate at 5% following lower-than-forecast inflation figures for September.

Meanwhile, on Thursday, the European Central Bank is also anticipated to leave interest rates unchanged, with a deposit rate of 4% and a main refinancing rate of 4.5%, reaffirming its “high for longer” rate message. Eurozone business conditions PMIs for October (tomorrow) are anticipated to remain weak.

In Australia, focus will be on inflation figures for the September quarter and the month of September, scheduled for release on Wednesday. Shane Oliver, AMP’s chief economist, predicts the CPI will show a 1.1% quarter-on-quarter increase, reducing annual inflation to 5.3% year-on-year, down from 6% in the June quarter.

Market reactions to this data will be closely monitored, especially given RBA Governor Michelle Bullock’s first appearance in Canberra on Friday, providing her with an opportunity to react to the CPI release. Her Tuesday speech is expected to have less impact in light of the impending CPI data.

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