Overnight markets refused to follow the simplest script. A day after September CPI lifted October hike odds from about 22 percent into the high 20s and 30s, Treasury yields went the other way: the 5 year eased 8.0 basis points to 4.91 percent, the 10 year fell 9.5 basis points to 5.10 percent and the 30 year fell 9.9 basis points to 5.43 percent by the midday market table, extending the week’s pullback to 13.6 basis points on the 10 year and 18.0 on the 30 year. In Asian trade, Reuters put the 10 year down 4.4 basis points at 5.144 percent at one point in the session.
The dollar softened with yields. The dollar index fell 0.41 percent to 102.13, the euro rose 0.06 percent to 1.1211, the dollar fell 0.12 percent against the yen to 158.13 and 0.14 percent against the Canadian dollar to 1.4197, while sterling was flat at 1.3256. The clear loser was the Australian dollar, down 1.03 percent at 0.6913, after September employment fell 39,300 and markets lifted the implied chance of a November RBA hold to about 90 percent. Gold rose 1.46 percent to 4,167.90 dollars an ounce, consistent with buyers hedging both the inflation print and the fiscal debate in Bangkok.
Read together, the moves describe a market pricing two things at once. The policy path got more hawkish on Wednesday: December is now close to fully priced for a hike. The level, however, is doing work of its own: at a 5.10 percent 10 year and a 5.43 percent 30 year, real money buyers are willing to add duration even into a tightening repricing, which is why the long end has rallied on the week while the front end absorbs the Fed risk. Thursday’s 08:30 ET producer prices and retail sales, still to come at write time, are the next test of which side of that split is right.