As feared, the recent rally in the bond market is quickly proving that it was fueled by a correction from panicked levels surrounding the UK drama of the last week of September rather than fresh inspiration to initiate a sustained rate cut. Yesterday’s job openings data helped prolong modest gains that might otherwise have ended in modest losses. Either way, we find ourselves in the same position, with the big economic reports likely to set the tone and set the boundaries for the early October telemetry expedition. Today’s ISM data is the second of the three biggest tickets this week, with the last big ticket coming out Friday morning in the form of the Big Jobs report.
In other news, oil prices have been a hot topic recently due to the expectation and now confirmation of OPEC’s production cuts (an effort to stem the tide of recent price declines). It is natural and logical to expect a correlation between oil prices and bonds, given their common cousin, inflation. But in practice, we do see pockets of divergent activity.
In the shorter term, we are more inclined to see the recent rally in bonds less as a sign of economic fear and more as a technical pullback from the defensive and panicked trading surrounding the late September UK drama. That’s not to say the correlation to oil couldn’t pick up for economic reasons, but as always, we don’t rely on it to be a key indicator for bonds (more like “something that often tends to coincide and sometimes not coincide at all).