The impact of higher yields

Global rates remain elevated – with knock-on effects

On Friday, global bond yields eased off as AI-related equities fell nearly 5%. The US 10-year government bond yield dipped to just below 5%.

Even so, the US 10-year bond yield has risen by over 100 basis points since the end of February.

Over the coming few weeks, we will highlight some of the consequences of higher yields for the global economy and markets. This week, we are looking at housing. The US 30-year mortgage rate is now at 7.3%, up from 6% at the end of February.

Many homeowners will still have low mortgage rates, but each year there is a transition to higher rates as people move. The effective mortgage rate is now up to 4.3%. Mortgage payments are taking an increasing toll on US consumers with a home loan.

Multiplying the current mortgage rate by the median home price gives an annual interest payment of $30,561 or a monthly interest payment of $2,546, more than double the pre-Covid level. It's no surprise, therefore, that mortgage applications continue to dwindle.

Home prices are still holding up for now, but it is a key risk for markets.

Elsewhere, the French 10-year bond yield is now above that of the US for the first time in over a decade.

French yields are volatile (see below). The widening gap between the French two-year government bond and the German two-year equivalent is a concerning development.

Focus on the US's GDP release this week

Despite the shock to oil prices and the associated increase in short rates (and the rise in long-bond yields), the Atlanta Fed's GDPNow estimate for third-quarter GDP is 3.5%. The consensus estimate is 2.8%. This would be a remarkable result considering that real wage growth has been weak across the board. US GDP is due out on Thursday. 

Another great earnings season loading in the US

So far, 121 companies in the S&P 500 have reported third-quarter earnings. Of those, 83% have beaten on the bottom line.

The current consensus forecast is that earnings growth in the third quarter will be up around 30% year-on-year.

The net profit margin last quarter was 17.1%, the highest since FactSet started tracking the series in 2009. If large valuation gains from Alphabet and Amazon are excluded, the profit margin would be 15.1%, still the highest since 2009. Analysts expect net margins for S&P 500 companies to dip to 14.9%, then increase going forward.

In summary, it looks like another great reporting season in the US. However, it should be noted that two companies accounted for 34% of S&P 500 earnings growth in the quarter. Ten companies account for two-thirds of third-quarter earnings growth, according to an analysis by the Wall Street Journal. Earnings growth is currently a concentrated reflection of the artificial intelligence (AI) and energy trade.

In addition, while there have been widespread beats on the earnings, the average beat so far is just 2.1%, well below the five-year average of 7.5%, according to FactSet data.

Bank of America's results were interesting. The company hired 1,000 contractors to patch flaws exposed by Mythos. Management does, however, expect AI projects to drive $700m in benefits next year.

French business and manufacturing confidence rise

Despite a recently volatile environment in France, composite business confidence rose in October from 96 to 97 points, though still below its long-run average of 100.

The real story, however, was the turn in confidence in the manufacturing industry, which is currently at its highest level since July 2022, at 105.3 points.

Retail confidence dropped to 93, and employment confidence dropped to 95. The demonstrations in France remain a concern, and Moody's decided last week to keep France's credit rating unchanged but with a negative outlook.

The Fed, ECB and Bank of Japan all decide on rates this week

The US Federal Open Market Committee (FOMC) will announce its latest interest rate decision on Wednesday. The market is not pricing in a FOMC hike at this meeting. Core inflation remains relatively contained at 2.6%, while GDP growth is expected to be strong when the first estimate comes out on Thursday. Core personal consumption expenditure inflation (also due out on Thursday), however, is likely to be above the Fed's 2% target, at 3%.

The European Central Bank is also not expected to increase rates this week. Euro area headline inflation is currently running at 3.8%, well above the central bank target, while the euro area economy is expected to grow at 1.1% this year, according to the IMF.

Neither is the Bank of Japan. While inflation has been rising, the nationwide headline inflation rate is currently 2.1%. The Bank of Japan will likely be primarily concerned with demand-side dynamics in light of robust wage growth. 

China's economy accelerates

Third quarter Chinese GDP growth was 4.5%, just above the consensus forecast of 4.4% and up from last quarter's 4.3%. Nominal GDP growth accelerated too, to 6% year-on-year.

The shining light for the Chinese economy was again exports, up 36% year-on-year in September. Domestic demand is weak, though, and retail sales were up just 1% year-on-year in September.

New loan growth has been particularly weak, down over 50% year-on-year. Domestic demand in China is likely to remain weak for the foreseeable future. 

SA inflation rises, distorted by fuel inflation

Last week, Stats SA released September consumer inflation data. The September print came in slightly below the consensus forecast of 4.6%, at 4.5%.

Headline inflation is running above core inflation, illustrative of pressures emanating from higher fuel prices. Food inflation is currently at 1.2% year-on-year, and fuel inflation is at 27.9%.

In essence, higher fuel prices are exacerbating inflationary pressures. The difference between headline inflation and headline inflation (excluding fuel) is currently 0.9 percentage points. Headline inflation (excluding fuel) is, however, running within the central bank's target range at 3.6%.

Even so, services inflation remains elevated at 4.9%, in part due to 7.4% increases in water prices and 7.9% increases in electricity prices. Inflation, excluding administered prices, is at 3.3%.

SA's MTBPS was credible

Finance Minister Enoch Godongwana presented the Medium-Term Budget Policy Statement (MTBPS) last week. Key among the announcements was the process of implementing a legislated fiscal anchor. Disappointingly, there is no explicit numeric target but rather a principles-based approach. Each administration will have the flexibility to set its own fiscal anchor, provided the legislation passes.

Unsurprisingly, the GDP growth estimate for 2026 was revised down from 1.6% to 1.2%, and the inflation estimate was revised up from 3.4% to 4.4%. The persistence of the war in the Middle East presents some risks to the outlook.

The key highlight was that South Africa's debt-to-GDP ratio has peaked. This supports the overall fiscal consolidation story, which remains intact. This will thus likely support the rand and South African bonds, with potential upgrades to come.

Debt service costs remain a concern, with only a gradual decline from current levels through to 2030. This illustrates the extent to which high debt service costs may continue to constrain spending on other priorities.

Even so, capital spending is receiving special attention and is set to grow in real terms and a material upturn in gross fixed capital formation is expected.