Fed minutes reduce October rate hike odds

The CNBC app, global market news in one place. Customizable sections and personalized alerts. Stocks tracking, interactive charts, and market insights, all in your hands. Stay connected. Stay informed. Download the CNBC app today. Hello, welcome to Schoolbox Europe. I'm Ben Bulos with Karen Cho and Steve Cedric, and these are your headlines. The route in global government bonds eases as the latest Fed minutes dial back the odds of a second consecutive rate hike this month. While Wednesday's 10-year Treasury auction also draws solid demand, bringing the yield down from a 24-year high. Battles at the barricade and the bond market. France bracing for further student protest today as the prime minister Sebastian Lukonu admits the anger is not unprovoked whilst also looking to ease fears around a potential debt spiral. It is parliament's responsibility indeed its foremost responsibility to provide the country with a budget. I therefore appeal to everyone's patriotism so that the ongoing discussions lead to the necessary compromise. Our commitment is to bring this public deficit down to 5% by 2027. I state this with all due gravity. >> EU Trade Commissioner Marish Sheffic heads to China for two days of trade talks with Brussels eyeing a cap on hybrid car imports on China's surplus over the block balloons to1 billion euros a day. A lot of volatility stemming from the bond markets impacting what we saw on stock markets yesterday. A reversal across the board. So backing off recent record highs on the S&P 500 and the NASDAQ only just get into that territory but pulling back then 210 of a percent for the S&P 500. The same stocks driving the rally a day earlier also undermining some of the strength. the likes of Meta, the big moving stock to the downside for the NASDAQ and Nvidia for the S&P 500. So, a day of reversal thanks to some of those Treasury numbers we're watching very closely. The escalation in the tenure before a bond auction that uh went away smoothly or was conducted smoothly enough so to cause a reversal in those bond yields providing a little bit of cover. But as we now roll across to the Asian markets, let's just take stock of what we've got because the red on Wall Street now also just moving on to the boards in Asia. We're down one plus percent on Japanese stocks. Hong Kong also down low with Shanghai 1% in the red and the South Korean market leading the way lower down 2%. So the tech rally that we've been talking about for a number of sessions coming unstuck in the last 24 hours. I want to take you to the European futures and what was it set up for today on the back of a fall of 1% yesterday. We broke a 3-day winning streak. So, it does look as though we're settling back into modestly lower territory this morning. Now, I mentioned the yields. Treasury yields came off their highs after the US Treasury sold 39 billion worth of 10-year notes at the highest auction yield since 2000 at 5.3%. Indirect biders, which includes global central banks, took more than 80% of the auction, above the recent average. It was the second of three Treasury Department sales this week after the US government sold 58 billion in three-year notes Tuesday and is scheduled to sell $22 billion in 30-year bonds today. And don't forget, there's been a lot of heat in that long end of the curve, the 30-year we're perched at 5.7%. We continue to escalate there. The Treasury also will stage its latest buyback operation today, targeting maturities between 20 and 30 years. To the European yields and the picture we're watching here this morning, as we again see that escalation across on the Treasury market, you've got OATS still elevated and this has been the pressure point in Europe. The spread we're seeing on OATS over German bonds. It's been roughly 130 odd basis points. But there have been fears too whether this now spills across to some of the other European markets that have had a lot of cover from low bond yields in recent years and that have been repairing their houses. So even with the fears now around France, there are fears that could spread elsewhere. Ben, >> you may well have made uh a couple of notes in your calendar because the countdown is on to the Federal Reserve's two final meetings of the year in October and December. And the minutes from September's meeting have provided some insight into when the Fed may hike. Steve Leeman has all the details. >> Fed officials in their September meeting agreed to hike rates unanimously, and most agreed it would be appropriate to hike once more this year. According to the minutes of the meeting, many said it made sense to hike on risk management grounds to provide insurance against persistently high inflation from supply shocks and strong demand. The minutes also said several members saw the policy rate as only mildly restrictive or not restrictive at all, that there was insufficient progress on inflation and the risk were to the upside and the labor market was close to full employment. The concern was that higher prices could eventually seep into inflation expectations and drive up wages. But since the meeting, several key Fed officials have given signals that if a hike is coming this year, it's unlikely to happen in October. Both Fed Vice Chair Phil Jefferson and New York Fed President John Williams have said the Fed could benefit from taking more time before deciding its next move. Markets have largely priced in this outcome with a 17% chance of a hike in October, but an 82% probability of a hike in December. For now though, higher bond yields, especially on the longer end, do some of the work for the Fed by restraining demand and investment. But if inflation doesn't ease, it's more likely the Fed will have more work to do. Steve Leeman, CNBC Business News. >> Well, let's ask Chris Watling about this. He's CEO and chief markets strategist and founder at Long View Economics. Chris, um, Steve Leeman is brilliant on US economics, but I can't help thinking that him focusing on inflation and jobs and the recession and the market reception to that isn't the entire story. the the the story for me is about the willingness of people to buy your paper without you having a plan to get down the amount of paper that's coming out going forward. If people think you're going to issue a lot more debt, they're going to hold off a little bit thinking, well, why don't I just hold out for a better price? And I kind of think it's that simple. >> You in terms of the bond market and in terms of yields and >> well, in terms of we keep I we ran a headline this morning, bond market route bait or bond market route back on on a different day as well. This is all about simple financial responsibility. If people believe you got your house in order, then they will buy your paper. If they don't, they will have skepticism. >> I actually I don't really think it's about fiscal. I think it's about the fact there's a a lot of debt issuance, but a lot of it's now coming from corporates. And so, if people are issuing debt, basically the other side of that is is growth. So, it's it's the opposite side of the same coin. If I if I'm a company, I issue a load of debt and go and spend the money, I'm driving better growth. So, I mean, we put out a piece several months ago saying, you know, the the economy is changing in the US. The capex boom's growing. That's driving more growth. Bond yields should break out of their range, and that's what we've seen. So, a and if you break down 10ear nominals, it's all real yields pretty much. It's not the implied inflation story. So, yes, the fiscal deficit's too big for sure, but but in reality, what's changed in the last year is is a capex boom's accelerated basically. >> That's great. And that's positive and positive for the economy and we're seeing the benefits of that and we're going to see it in the third quarter again. But you you've kind of swept aside the whole sovereign debt crisis that we saw in 2010 to 2012 or certainly the the prospect of that returning this time round and but the ingredients are all there. Chris, you I remember chatting to you in 2010. >> Yes. Yeah. Yeah. Yeah. >> You're looking damn fine after another 14 16 years. But the >> top 14 of your 25 years. Yes, you certainly have. But but seriously, um these this is a major problem, isn't it? The size of the deficits. >> Well, I mean, look, there's there's three big deficit countries with with serious problems, big economies. Well, you know, in terms of the ones people focus on, US, UK, and uh and France, and yeah, China is an issue, but it's a kind of a different ballgame. Um yes, French spreads blowing out is an issue. Uh but we all know that at some stage, not yet, the TPI will come into play. Uh and of course that's politics and that's when the ECB decides there's too much stress in the system and when they've tamed the French politicians. But but but it's there. We know it's there. And I um we also know that if there really is uh I think I think what what's happening here is liquidity is tightening up in the world and it's showing up in lots of places, not just French spreads. It's showing up in US Triple C. It's now showing up in high yield. It's showing up in a lot of stocks and and eventually the markets we're we're building to a sell off in risk assets in my opinion and that will change the dynamics of interest rate expectations and bring liquidity eventually back into the system. >> That is fascinating. So, so I want to ask you about that because it feels as though there's been a disconnect between what bond markets are seeing and the repricing that has happened there versus equity markets and our site what we've seen record high on the S&P 500, record high on the NASDAQ, not too far off the records on the Dow versus repricing where SoftBank now goes to market on its raisings and it's at what 9%. >> Yes. >> So that's a disconnect we're seeing in the bond markets and the equity markets. >> Yes. Well, it's like a pressure cooker and I think every few years we get this when when and it generally happens when central banks change their sort of direction of travel. So wine back 12 months everyone was cutting and now everyone's hiking. In fact last month we had more hikes from across 90 central banks than we've had in many years and and so that that leads to a tightening liquidity and it gen it generally shows itself initially in spreads in credit in bonds. We're starting to see it in a lot of parts of the equity market and of course the S&P is holding in for because of you know seven stocks or however many stocks it is. >> So are you saying we're setting up for a sell off into >> Coyote is what I say. >> You're saying we're we're setting up for a selloff into year end because some think we're firmly in a bull market not just now but for years to come. >> Yeah. I think we got a two to six month sell off in in risk assets that's brewing and that's going to break any any moment now basically. And there a lot of parallels with 2018, a lot of parallels with 2015. I remember 20 2015 or even 2011 since since Steve brought up the Euro crisis, first half of 2011, market goes sideways, breadth falls apart and then bang, the market falls apart in July. Now we look back on it and we say it was the Euro crisis. Same thing in 2015. First half of the year, the market's sideways from February to August and you're like, what's going on here? But the breadth is deteriorating because the pressure is building and then in August, bang, the market sells off hard. So, so I think we're we're this is the kind of environment we're in. The the rates are going up. The bulls are saying, "Wow, there's seven stocks with amazing earnings growth. Don't worry about it." Uh, but in reality, everything's falling bit by bit. The the the sort of dominoes are going. So, so I think we'll see uh yeah, I think we'll see a big a big chunky sell-off. It's a lot much more fun. Chris, do you think this this coming earning season's going to be enough to propel equities to to fresh record highs or is it, you know, is the concern about the high borrowing cost going to start pinching things? >> Well, that's definitely the bull's argument and that that's, you know, but I would say look at look at earnings growth. You look at 12-month forward earnings growth. Uh, in the US, you're looking at plus 36% expectations. That that is basically what you get out of a recession. You know, you when earnings are really beaten up, you don't get that in the middle of the cycle. So, I I don't know what's going to happen on earnings. All I know is expectations are really high and a bunch of stocks have got to do a lot of work. So, I suspect I suspect we'll we'll see that they're not as good as they need to be. >> And what's your take on the current sort of European um situation, the picture? I mean, with the whether that's the French sovereign debt and the the yields there spiking, there are reports about the UK housing market starting to fill a pinch from higher mortgage costs. Um in terms of what the way you see Europe where where are the opportunities or or or are you still sort of you know more favoring the US rather than Europe? >> Well, I mean there are there's opportunities everywhere. I mean if you look at Eurone consumer staples is not the sexiest sector out there but it's valuation relative to the market has never been cheaper. So so these stocks are deeply unloved, deeply beaten up and of course they don't like rising bond yields. and and once this sort of rise in bonials breaks then I think you'll find that actually those sort of places are a good a good place to hide for a few months. >> Christopher um both of your key headlines this morning big chunky selloff and wy coyote moment have have pricricked my attention as well. So just explain uh and I'm getting.com to have a look at this as well. So um yeah, explain to me what a wy coyote moment is and why the market's going to have one. Well, I'm sure you remember the cartoon. >> I spent my life watching children's television. So, >> it is Roadrunner, isn't it? It's Road Runner. I'm >> so Wy Coyote runs and runs and runs. Road Runner gets away. We have a cliff edge and he's running and his legs are moving around. Is that the wy coyote moment? >> Exactly. Yes. Exactly. He goes over the cliff. >> I say it doesn't get in the com piece. >> He's He's goes over the cliff. The cliff's there and he's suspended and and he's there for a moment and then bang, down he goes. Um yeah, I'm trying to remember the cartoon myself now, but yes, of course, we grew up on it. And yes, he's chasing Roadrunner, isn't he? That's the point. And and >> the market, the analogy for the market is >> well, the analogy for the market is as Karen described, you know, it's the S&P seem suspended up at record highs and and bit by bit, the the dominoes are falling in global financial markets. >> And when you say big chunky selloff, what does that mean in terms of how far you think we can go? I think every two to every every 3 years we get a what I call a sort of two to six month pullback and the size is maybe 10 to 20% on the S&P. >> Sorry that that that's correction to bare market. So what do you think we're going to get? I'm sorry I'm sorry to make it more specific than 10 to 20 because I can get a bust through that one but but do you think we're going to have a correction or do you think we're going to enter a bare market? >> Look, I mean the you I'd say we're arguing the toss. I mean whether it's 19.9 or 20 who it doesn't matter. >> You do think we're going to fall 20%. Well, I don't I don't know whether it's 10 or 20, but I think the point is it's meaningful enough to to think about life. Fair enough. >> $1.2 trillion in 2027. AI spending. Why is that enough not enough to bring about growth and keep us in a bull market? >> Well, I'm not suggesting we're going to a recession. I'm just talking about a midcycle correction. I I I think the interesting point today is that this the setup in the economy is in a very different place from the setup in the market. And it's really this Iranian war and the and and the oil price and what it's done to central bank liquidity and central bank intentions about rates that's changed the dynamics for market and made it harder for markets. So So market sells off on liquidity, you reset interest rate expectations and then the economy goes again. I I think the economy is in good shape. So, so just to to be clear, if we had the Middle East situation and it magically got solved and you know that is still a wild card whether the President Trump can get this fixed with a a matter of one big phone call that seems to end the the stalemate. Would that change the scenario? >> Possibly, but it may be too late. I mean, potentially if suddenly the oil price is off 30, 40 bucks, that could change the situation. But like you say, I mean, we've had this several times over the last few months and the market's very skeptical about it. >> Okay, Chris, thank you very much. Uh Chris Watling, CEO and chief market strategist and founder at Long View Economics. Still to come on the show this morning, the French Prime Minister says he'll address the grievances of students as protests continue gripping the nation. Charlotte will join us with the latest. Plus, as countries develop space weapons, experts warn against the lack of transparency. MDA space's CEO Mike Greenley joins us. And investors and tech leaders gather in Churin for this year's Wave by Vento conference. Don't miss Caroline's interview with Anish Acharia, partner at Andreston Horovitz. That's at 8:45 London time. Executive Decisions is the new podcast from CNBC where I ask powerful leaders about their decisions that changed everything. I'm Steve Sedick. Here's Miss Joe Malone at CBE. >> I started that first business of skincare. That's when I knew that I was in charge of my own life. And that's when the entrepreneur really, although I didn't know what the word entrepreneur meant, that's when the entrepreneur really took hold. >> That's executive decisions with me, Steve Sedwick. Get it wherever you're listening to this. The French government has stopped the use of stun grenades against protesters after a 15-year-old's hand was blown off during clashes with riot police, fueling accusations from protesters of police brutality. More than 500 schools were closed yesterday, and unions representing students, teachers, and other workers said more marches were planned for today. Meanwhile, the French Prime Minister, Sebastian Lulnu, pledged to address the concerns of those protesting, saying that the anger from young people didn't come out of nowhere. Charlotte joins us now. Um, Charlotte, it's all very well for the prime minister to say he will address the concerns of those protesting. Is there any sort of meaningful um detail on how that will happen? >> No. And that's really the main takeaway when we heard that the prime minister would be addressing the nation last night prompted of course by this protest. you know were expecting maybe some announcement but actually no real announcement was made but from saying that the government was listening kind of bringing out a little bit the solution that they had after the Gileon saying they're opening a platform online where people can uh talk about explain their needs they want and why they're protesting and that the government will make some consultations and maybe present a new plan and some decisions by the end of October. He did note that education was one of the areas in the new budget that might be increasing by 1.2 two billion next year, but the increase, however, remains lower that the rate of inflation. So, is they're hoping at least that they can help calm things down. Certainly halftime is around the corner. There's a bit of a feeling that they're trying to, you know, bring things down a little bit, cool the heat and bring it to the holiday and then bring in some some proposals. Certainly the the prime minister seems to be very keen though to reinsure investors rather than their high school students. And there was a big focus on this. He talked about higher energy prices, how this is pinching the wallet of many. Uh and he confirmed the release of 10 million barrels of diesel from strategic uh reserves. He said this will automatically lower prices at the pump by an estimated 12 to 18 euro cents per liter. Now he insisted again that he understands the demand for general aid and massive tax cuts, but he said that this is not possible anymore given the state of public finances. said relieving one bill today would only create an even heavier one tomorrow because of course one of the multiple crisis uh that the government is facing is of course a question of the budget and the public finances. They presented their proposal uh last week including 54 billion euros in adjustment uh in in savings uh proposed for the budget. The negotiations in parliament will start next week and he said he was convinced that parliament will ensure that France has a budget. Take a listen. We are doing this because making these decisions today while sharing the burden fairly will help avoid far more drastic measures down the line. Adopting a budget after the presidential election would prolong uncertainty until next autumn, stall investments and significantly weaken the country, leaving it vulnerable. I'm therefore convinced that Parliament will ensure France has a budget. The opposition has the right to object. The bill can certainly be debated, amended, and modified line by line if necessary. Yet, it is Parliament's responsibility, indeed its foremost responsibility, to provide the country with a budget. I therefore appeal to everyone's patriotism that the ongoing discussions lead to the necessary compromise. Our commitment is to bring the public deficit down to 5% by 2027. I state this with all due gravity. The initial target was 4.8%. We raised it to 5% to meet our national defense needs. That was Prime Minister Sebastian speaking last again appealing to the patriotism of the members of parliament where they will debating uh the budget. Of course that's seen as a bit of a call towards the far right the biggest party in parliament because we know that the far left have said they will block this budget altogether. The far right were waiting here to hear from them. Maybe they might abstain. They want to be seen as responsible when it comes to the economy. They want to reinsure investors themselves. Actually, Marin Lupin earlier this week presented her own cattle proposals for the budget and how she will control public finances if she's elected next year. She talked about 140 billion euros in savings in 2032 if she's elected next year. So, during the five years of her mandate. So, she's trying to build her credibility when it comes to the economy, something that she's been lacking in recently. But a lot of the economic analysis have come out saying actually the numbers and the figures have been proposed kind of don't really make a lot of sense and don't make a lot of economic sense in the saving that been proposed uh by Marin Lupin. But today is a fourth day of mobilization and protest in the country. We've seen that students have joined uh the high school students uh also some unions teachers etc. So we have to wait and see how how far this mobilization goes. It suddenly came out of nowhere for the government. They got really blindsided. came really fast and really strong dismobilization on top kind of a a symptom of the multiple crisis that they are dealing with and the questions of the budget and the cuts that they want to make really embodying how difficult it is to do it with the public opinion and that the public is not happy to receive them. >> Just confirming they're rioting now during school time. >> Yeah. >> Yes. >> And it's half term next week. >> It started as protest. That's been pockets of this >> protesting during school time. Yeah. Will they be protesting during half term? >> But that's >> I'll have I'll have a pound. I'll have a 100 French ride it out until half term. >> I'll have 100 French with you. We don't see a jot of them during half term when they're on holiday. >> But it is a movement that is growing. It's not just the students. The unions are joining. You know, you have you see more adults in the protest as well supporting the demand of the students. A lot of them say, "Look, they just want to be studying. They just want to be able to to have more resources in their school. They're boiling in summer. They're freezing in winter. A lot of their demands are actually very fair and and you know very legitimate but there also pockets of violence within these protests that you know have shown some pretty terrible pictures uh on TV and certainly you know this is not adding to reassuring the the investors are there that the government can make the cars that they want to make. Every time there's been a crisis in the past, the government has responded by writing a check and that has led to the situation where we are now. And they have very clearly saying we cannot write another check and so we in that situation where how do they resolve this the the the the demands in the street from the protesters. >> So Charlotte, the youth vote typically swings to the left, doesn't it? So if we think about the shoot in protest and how that might shape some of the maneuvering ahead of the presidential election, how do we draw those threads together and who could benefit if the situation persists for much longer? >> Certainly we've seen a lot of the um la Franceumi so the far-left group very much vocally supporting the supporters actually joining them in the street some mayors and some peace joining the proteters in the street. Now this is high school students they cannot vote yet. Certainly it is you know future voters um and students also now that can vote and now they are joining in the protest as well to the university students but these are high school students so they don't vote just yet so you know you can't blame that there's a lot of political game uh in just trying to listen to their to their >> dem system as you say is university students who can vote the parents who are impacted. >> Yeah. Yeah. Yeah. It certainly and we see that students and universities are starting to join the blockade as well. So that's that that is the the question now for the government. Is this movement going to grow into something much wider that turns into strikes that turn into wider protests with unions joining potentially or can they momentarily you know appease the movement and bring it all to to have things come down. >> Does this does this benefit Marine Le Pen or does it benefit the the the far left? >> It's more the far left I would say. Marine Le Pen to a certain extent when it's all about order and putting order. So people that are critical about the pictures that we've seen, you know, you've seen fire trucks set on fire, some schools set on fire. Certainly that goes on in the in the in favor of Marine Le Pen who is very much on the side of order and you know respecting the police and respecting that. So some voters will actually see some some voters will actually go more towards Marine Leen and what she's been saying in public and some voters might actually more towards the left as well. And you then you have the government in the middle that has to appease everybody and it's pretty hard. >> Okay, Charlotte, thank you very much. The 87year-old woman who was forcibly evicted from her home of seven decades, triggering nationwide protests and ultimately a snap election in Spain has died. Maria Del Carabascal had been in hospital since being removed from her home on a stretcher. It had been purchased by an investment fund which hiked her rent by more than 200%. She had since been allowed to return home but was unable to do so. Protesters camped out in Madrid's Soul Square held a minute silence after hearing of her death. The EU trade chief Marashvkovich is in China for two days of meetings with his Chinese counterpart Wang Ventaro as the block looks to resolve its trade deficit with the country. It currently runs north of a billion euros a day. European leaders are due to meet this time next week, having leaned on the commission to cut China's trade surplus with the block, which widened by nearly 10% in the first 6 months of the year. Measures under consideration reportedly include a cap on imports of Chinese hybrids as the success of China's automotive sector has spelled trouble for European car makers. German flagship Volkswagen is currently in the midst of the largest restructuring in its history, laying off tens of thousands of workers.