The long end is doing the Fed's work, and housing breaks first

Noise in the hike talk, signal at 66.0

The headline of the past two weeks was that a Fed which hiked in September would return to hiking on 28 October. The market's own pricing has moved the other way over the last 30 days. Data cited by Rallies.ai show the probability of a hike of at least 25 basis points at the 27–28 October meeting fell to 17.2% on 20 October, from 22.1% a week earlier and 57.6% a month ago.

The data behind the decline arrived on 20 October. NAR figures reported by HousingWire and Reuters show the index of signed home contracts fell 7.3% to 66.0 in September. Economists in the Reuters poll had expected a decline of just 0.5%, and the index hit the bottom of a series that began in 2001. The annual decline is 11.3% on a seasonally adjusted basis and close to 13% on Bloomberg's unadjusted measure.

The yield curve is doing the tightening

The break in housing comes not from the policy rate but from the long end of the curve. Freddie Mac says the 30-year fixed mortgage rate held at 7.40% in the week of 15 October, against 6.27% a year earlier. That 113 basis-point rise feeds straight into the monthly payment of a household buying a home.

On the official US Treasury curve on 20 October the 2-year yield stood at 4.79%, the 10-year at 5.12%, the 20-year at 5.47% and the 30-year at 5.42%. The 2-year rose 2 basis points on the day while the 30-year fell 6. The market has begun pricing a Fed on hold at the front end and weaker growth further out. Because contracts turn into closings within 1–2 months, NAR says, this break will also feed into existing home sales in October and November.

October data show no improvement either. HousingWire's weekly measure shows new pending single-family sales fell to 51,947 in the week to 16 October, down 13.1% year on year. The regional breakdown points the same way: the index fell 9.2% on the month to 49.3 in the West and 12.0% on the year to 79.2 in the South. NAR chief economist Yun said rates may be close to peaking; Freddie Mac's 22 October data will test that claim.

In Europe, ECB President Lagarde made the same point. In a statement to the IMF's International Monetary and Financial Committee on 20 October she said long-term rates had risen markedly since the last meeting in September. Tighter financing conditions, she said, will slow growth and price pass-through more than the September projections assumed. Ahead of the 29 October meeting, that means the long end is taking on part of the ECB's work.

Where wages hold up, central banks still hike

The 2 exceptions to the rule are countries where labour markets remain strong. In the UK, ONS data show unemployment fell to 4.7% in June–August rather than the expected 4.9%, with regular pay growth at 3.7%. FXStreet says the market assigns about a 95% probability to the BoE raising rates from 3.75% on 5 November. MPC member Greene sees pay growth of about 3% as consistent with the 2% target and says the policy stance is not tight enough.

Canada's picture is more mixed. BBH says the swap market prices a 78% probability of a 25 basis-point hike on 28 October, up from 60%. Headline inflation rose to 3.1% in September, but the average of the bank's preferred trimmed-mean and median measures fell to 1.85%. BBH considers the 100 basis points of tightening priced over the next 12 months excessive; this hike, too, would be a response to an energy-driven headline.

Canada's political risk eased in the same week. In a non-binding vote on 19 October, about 76% of Alberta voters rejected a proposal to start a separation process, with roughly 1.8 million votes counted. With the province holding the world's 4th-largest proven oil reserves staying under the federal roof, the Bank's 28 October decision rests on price data alone rather than politics. A Canadian hike would therefore carry its full weight on housing and borrowing without any political cushion.

On the periphery, the bill is paid in risk premiums

While central banks wait, the bill for peripheral countries rises through risk premiums. The 10-year spread between France and Germany widened 8.5 basis points to 150.8 on 20 October, with the German 10-year at 3.42% and the French at 4.93%. Moody's reviews France's Aa3 rating on 23 October, and a one-notch downgrade would take it to A1.

In Latin America, Argentina's country risk rose from 589 basis points on 12 October to 710 intraday on 20 October. In Brazil, polls ahead of the 25 October run-off show the candidates 2–3 points apart, within the margin of error. The common denominator is the US 2-year yield holding at 4.79%: until the front end comes down, the funding cost of high-yield debt will not fall either.

What to watch

Over the next 8 days 4 dates will test the thesis: UK September inflation on 21 October, Moody's France decision on 23 October, Brazil's run-off on 25 October and the Fed and Bank of Canada decisions on 28 October. The indicator that would refute the thesis fastest is the 30-year Treasury yield breaking above 5.6%, which would show the long end pricing supply rather than growth. On housing, if Freddie Mac's 22 October weekly rate does not fall below 7.40%, the drop in contracts will carry into November.