UST yields likely to trade higher in near-term amid Fed’s hawkish stance, balance-sheet unwind: Scotiabank

The United States Treasury yields are expected to trade higher in the near term owing to a sound GDP in the U.S. economy and rising CPI inflation amid the Fed’s hawkish stance, the Fed’s balance-sheet unwind and ballooning US budget deficit, according to the latest research report from Scotiabank.

In the medium term, however, a potential slowdown in the US economy and falling oil prices could drag down the 10-year UST yield and boost EM Asian currencies.

The US economy expanded at an annualized rate of 3.5 percent between July and September after the 4.2 percent pace in the previous quarter, with signs that the growth could cool in the coming quarters.

The country’s ISM manufacturing index fell to a six-month low in October, raising concern over a synchronized global slowdown. Data released earlier have showed cooling factory activity in the EU and China as well.

Further, the US added 250,000 jobs in October with the unemployment rate remaining at 3.7 percent. The labor force participation rate increased to 62.9 percent last month, and the employment-to-population ratio edged up to 60.6 percent.

US average hourly earnings for all private sector workers rose 3.1 percent from a year earlier in October, partly due to the base effect. US PCE core inflation is expected to stay at around current level, suggesting that the Fed will stick to gradual rate hikes in the months ahead.

"We keep a close eye on the 10-year UST yield and the US-China bilateral relations and stay nimble on swinging risk sentiment. The 10-year UST yield rallying through 3.20 percent is expected to weigh on US stocks further and spark another US stock selloff in the foreseeable future," the report commented.

White House economic adviser Larry Kudlow on Friday downplayed the prospect of a US-China trade agreement. However, US President Donald Trump subsequently countered Kudlow’s less-optimistic tone by saying he thinks a trade deal will be done.

Meanwhile, comments from Trump will likely prop up EM Asian currencies further ahead of the Trump-Xi Summit set for November 30 - December 1.