The Tipping Point

Egg teetering on edge of table

Global markets were higher on the week even as long-term interest rates continued to rise. For the week, the yield on the US 10-year Treasury note rose over 30 basis points, reaching 4.88%, its highest yield since 2007, shortly after the release of the latest US employment report. The price of a barrel of West Texas Intermediate crude oil fell over $9 to $82.70 as demand for US gasoline slipped and Russia resumed diesel exports. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 19 from 16.4 a week ago.



In Canada, we reported a jump in employment in September. The magnitude of the surprise was greater than economists had expected, with our economy gaining of 63,800 positions, more than triple estimates. On a closer look, a lot of the gains were part-time positions and we think this will still keep the bank of Canada on the sidelines later this month.



The US economy added 360,000 new jobs in September while revisions added an additional 119,000 positions to the tally. The unemployment rate held steady at 3.8%. Wage growth was muted, rising 0.2% month over month and 4.2% year over year. Combined with a jump of roughly 700,000 in job openings in August and the persistently low levels of weekly jobless claims, it appears that the US labour market is no longer cooling, as the US Federal Reserve would like. After the release of the data, the US 10-year Treasury yields rose about 14 bps, to 4.88%, the highest level since 2007. The 2s-10s Treasury yield curve flattened to -25 bps, the shallowest inversion in nearly a year. Amid this continued bear-flattening, the US 2s-10s yield curve steepened an additional 17 bps this week to -25 bps. The curve was inverted by as much as 1.1% on 3 July. Yield curves typically flatten in advance of recessions but are usually driven by declining short-end yields, not rising long-end ones. I have been watching the spread between the 2 and 10 year yield curve closely and it would indicate we are getting very close to major tipping point which will drive bond and equity markets performance going forward.

For much of 2023, the US services sector has performed solidly while the manufacturing sector has retrenched. However, purchasing managers’ indices show that the pattern reversed in September as the manufacturing index rebounded to 49 from 47.6 while the nonmanufacturing measure slipped to 53.6 from 54.5 the month before.



German exports fell 1.2% in August amid cooling global demand. Demand was weakest in Europe and the US, though exports to China saw a small uptick.



The yen weakened past 150 to the dollar this week but quickly rebounded because of fears of intervention from Japan’s Ministry of Finance.


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