A Look at the Day Ahead in U.S. and Global Markets

By Mike Dolan

U.S. Treasuries are starting to balk at post-election fiscal prospects, leading to a spike in benchmark borrowing rates that has knocked stock markets off their perch and lifted the dollar to its best level since early August.

Ten-year Treasury yields zoomed higher again on Tuesday, topping 4.2% for the first time in three months.

On one level, there's been a further dialing back of Federal Reserve easing expectations, with an implied 'terminal rate' for the Fed easing cycle backing up close to 3.5% next year, less than 150 basis points from the current policy rate.

The robust performance of the economy is mainly responsible for that, as is the steady stream of Fed officials speaking of only 'modest' rate cuts ahead. Trepidation about market-based long-term inflation expectations troughing as high as 2.3%-2.5% is also starting to shift the horizon somewhat.

However, investors are primarily focused on next month's election, with concerns over budget deficits already well north of 6% of GDP. Betting markets lean toward Donald Trump, who may aggravate fiscal situations further.

The New York Fed's estimate of the 10-year Treasury 'term premium'—a key measure of the compensation investors demand to hold long-term government debt securities—rose to its highest level of the year, exceeding 14 bps, having been negative for most of the year.

BlackRock's Larry Fink reiterated warnings regarding the deficit situation, stating that rising government debt is a 'big problem' and both parties are to blame for widening deficits.

The increase in Treasury yields this week has lifted the dollar index to its highest levels since August 2, influenced by market reactions to Trump's potential trade tariff plans. Goldman Sachs predicted that the euro could fall as much as 10%, suggesting it could drop below $1.0, should Trump impose widespread tariffs and cut domestic taxes.

Goldman’s Michael Cahill noted that a 10% global tariff and 20% levy on Chinese imports, combined with domestic tax cuts, could cause a significant rally for the dollar and a corresponding drop for the euro.

Although the euro regained some footing, the dollar continues to push higher above 150 yen, especially with markets eyeing Japan's weekend election. The Canadian dollar is also under pressure ahead of a possible jumbo 50bp rate cut from the Bank of Canada on Wednesday.

With worries over elections, debt, geopolitical tensions, and longer-term inflation, gold continues to climb but remains shy of intraday records set at $2740 on Monday.

The bond market movements have caused Wall Street stocks to slide back from new records, although tech-heavy Nasdaq outperformed and made some gains amid upcoming megacap corporate earnings later this month. Futures were mostly in the red ahead of Tuesday's open.

The macro world will focus on the International Monetary Fund's annual meeting in Washington, with the latest World Economic Outlook set for release and numerous top central bank officials scheduled to speak.

Overseas markets saw Japan's Nikkei down more than 1%, while Chinese stocks were mostly flat, and Europe also faced declines.

In corporate developments, tech sector news was positive for SAP, whose shares rose 5% after raising full-year targets based on strong cloud performance. HSBC Holdings announced a significant overhaul, combining some commercial and investment banking operations under new CEO Georges Elhedery, and appointed Pam Kaur as its first female CFO.

Key Developments for U.S. Markets:

• US Corporate Earnings: Texas Instruments, General Motors, General Electric, Verizon, and others set to report.
• IMF's World Economic Outlook release during IMF-World Bank Annual Meetings; key officials from ECB and BoE speaking.
• Richmond Fed’s October business surveys; Canada’s September producer prices.
• Philadelphia Fed President Patrick Harker speaks.