US Yields Surge, ECB's Lagarde Warns of Elevated Borrowing Costs

US Treasury yields surged to levels not seen since 2007, creating ripples across the global financial landscape. Meanwhile, ECB President Christine Lagarde voiced concerns about persistent inflation, setting the tone for a day of market volatility.

Key Factors for Today

• US Treasury yields hit a 2007 high, impacting major currencies.
• Fed speakers fuel the US dollar rally, with USD/JPY aiming for the 150 handle.
• ECB's Lagarde foresees elevated borrowing costs amid 'strong' inflation.
• Record-breaking US oil production forecasted for 2023 and 2024.
• Chinese property sector concerns rise after Evergrande misses bond payment.

Market Movers

• The 10-year US Treasury yield reaches 4.51%, pushing the DXY to 106.
• US equities make modest gains following the Writers Guild of America (WGA) and Alliance of Motion Picture and TV Producers (AMPTP) agreement.
• USD/JPY continues its ascent, closing in on the 150 mark.
• EUR/USD declines to a March low due to Germany's disappointing IFO reading.
• US oil production expected to hit 13M bpd in October.
• Russia lifts ban on low-quality diesel and marine fuel exports, while travel stocks feel the impact of higher rates.
• Evergrande's bond payment miss weighs on the Australian dollar.

Economic Calendar

• ECB Lane Speech
• S&P/Case-Shiller Home Price Index
• CB Consumer Confidence
• New Home Sales
• Fed Bowman Speech
• API Crude Oil Stock Change
• BOJ Monetary Policy Meeting Minutes

The Big News

US Yields Surge Amid Economic Uncertainty

Monday saw a significant development in the financial markets as the 10-year US Treasury yield soared to a level not witnessed since 2007, reaching 4.51%. This spike in yields sent shockwaves through the global financial system, with the US Dollar Index (DXY) climbing to 106. Despite weaker economic data, US equities managed to eke out modest gains, driven by the positive news of a three-year agreement between the Writers Guild of America (WGA) and the Alliance of Motion Picture and TV Producers (AMPTP).

Fed Speakers Add Fuel to Dollar Rally

In a gathering at the University of Pennsylvania's Wharton School, the Federal Reserve's Neel Kashkari expressed his anticipation of one more interest rate hike this year and a prolonged period of tight monetary policy if the economy exceeds expectations. Despite Monday's Chicago Fed National Activity Index and Dallas Fed Manufacturing Index falling below expectations, the US dollar continued its ascent to a fresh November high, as investors grew increasingly concerned about sustained high costs. The Fed's Goolbee echoed these concerns, emphasizing the risks associated with higher inflation. As a result, USD/JPY appears poised to breach the 150 handle, unless the support at 148.50 gives way.

ECB's Lagarde Warns of Elevated Borrowing Costs

ECB President Christine Lagarde reinforced the prevailing sentiment of rising borrowing costs during her speech before the European Parliament's Committee on Economic and Monetary Affairs. She underscored that borrowing costs would remain elevated as long as inflationary pressures persisted. While she acknowledged several indicators pointing to economic weakness, Lagarde maintained the ECB's expectation of avoiding a recession as a baseline scenario. This pronouncement led to a decline in the EUR/USD pair, which hit a March low at $1.0575, primarily influenced by Germany's worse-than-expected IFO reading. Analysts are now eyeing support at $1.0540, with resistance at $1.0615.

Record-Breaking US Oil Production Predicted

The Energy Information Administration (EIA) forecasts record-breaking US oil production for both 2023 and 2024, with output expected to reach 13 million barrels per day (bpd) this month. In a surprising move, Russia lifted its ban on low-quality diesel and marine fuel exports, reversing a decision made only last Thursday. However, restrictions on gasoline and diesel exports remained in place. The price of West Texas Intermediate (WTI) crude oil faced downward pressure, compounded by concerns about the travel industry's prospects amid prolonged high interest rates.

Evergrande Bond Payment Miss Sparks Concerns

Investor apprehensions resurfaced in the Chinese property sector as Evergrande, a struggling property giant, missed another bond payment, leading to the detention of its CEO and CFO. Liu Shijin, an official at the People's Bank of China (PBOC), indicated that further monetary policy easing was unlikely. The Australian dollar was notably affected by this development, retracing some of its gains from Friday but remaining above 0.64. Traders are closely monitoring support levels and resistance at 0.6447, as the Aussie consolidates following the RBA 2023 Conference on Inflation.