Swap Rates Have Muted Reaction to Biden News

Rates struggle for direction in the aftermath of Biden’s withdrawal. While Sunday’s news of President Biden ending his bid for re-election have dominated global headlines, swap rates held within a tight range before ultimately finishing 1-3bps higher across the curve. The roller coaster of presidential updates has yet to create volatility in fixed income markets, as the odds of a Trump or Democratic victory, coupled with ambiguity around the impact of ensuing fiscal policy, remains difficult to predict. Meanwhile, tech shares led a broad rally in equities today as the NASDAQ gained 1.6%, reversing a portion of last week’s 3.65% decline. The S&P 500 climbed 1.1%, its largest daily rise since early June.

China surprises with a rate cut. As China aims to boost its struggling economy and evade deflation, the PBOC (People’s Bank of China) announced a 10bp rate reduction to the seven-day reverse repo rate. The move was the bank’s first rate cut in nearly a year, and Chinese banks soon followed by announcing that they would reduce their main benchmark lending rates to 3.35% from 3.45%. Last week’s weaker than expected GDP report (4.7% growth versus 5.1% expected) likely contributed to the rate cut, as the data marked the slowest pace of economic growth in over a year.

Bank of Japan (BOJ) hike outlook complicated by consumer spending. As the BOJ approaches its policy meeting next week, officials are split on whether to hike or hold rates. Some officials favor holding to assess consumer spending, which contracted 0.4% in 4Q23 and 1.1% in 1Q24, while others point to accelerating inflation as a reason to hike. CPI climbed 2.6% YoY in June, up from 2.5% in May and the 27th straight month that inflation exceeded the BOJ’s 2% target. The BOJ is also expected to outline a plan to taper bond purchases, per their guidance at the prior meeting. According to futures markets, odds of a hike next week are roughly 40%.