Japanese Finance Minister Suzuki Issued Another Verbal But Unconvincing Warning

Markets

Yesterday was risk-off in every sense. Core bonds were up, equities down and the only competitor the dollar had on FX markets was the Japanese yen. Weakening global growth prospects has been the narrative all week. Fewer than expected weekly jobless claims in the US weren’t going to change that, even as it underscored the country as being something of an outlier for the time being. US yields shed between 1.3 and 6.9 bps. The front end outperformed. More Fed governors argued for a pause in September (eg. Williams) while others (eg. Logan this morning) added that more tightening may be necessary afterwards. Rates in Germany eased 2.8-4.4 bps across the curve. Stock markets lost about 0.4% in Europe. Tech was under pressure in the US as a Chinese ban weighed on Apple. The Nasdaq lost 0.9%. EUR/USD slipped on general dollar strength. The pair moved lower within the recently formed downward trend channel to close just south of 1.07. It’s the first time since early June it did so. DXY moved north of 105, the strongest level since March of this year. USD/JPY eased a few ticks to 147.3. Sterling fell against most peers but not the euro. EUR/GBP did test the 0.86 big figure before returning to opening levels of around 0.857. Gilts hugely outperformed Treasuries and Bunds after the Bank of England’s survey showed UK companies expect to raise prices for the year ahead at the slowest pace since November 2021. Company CPI expectations fell as well. UK money markets downscaled BoE tightening bets with less than two additional 25 bps priced in now.

The risk aversion yesterday filtered through to Asia. Equities slip with Japan underperforming. China’s yuan is grabbing attention. USD/CNY yesterday already closed at a new multi-year low and is extending gains this morning to 7.344, the highest since end 2007. The PBOC cut the fixing to the lowest in two months, at least suggesting it turned more tolerant towards the yuan. The next high-profile reference stands at 7.42 – the 61.8% USD/CNY recovery on the 2005-2014 decline. Japan is less comfortable with its currency declining. Finance minister Suzuki issued another verbal but unconvincing warning. USD/JPY dropped to 146.59 before paring losses to 147.2 again even as the greenback is catching a breather this morning. EUR/USD moves north of 1.07 with first resistance popping up at 1.0766. Core bonds gain ground. Current market dynamics could remain in place today. Risk sentiment turned for the better in a shift at the end of a gloomy week defined by rising oil prices and (rightly so) building expectations for higher rates for longer. The recent decline in European stocks brought the likes of the EuroStoxx50 towards important support (4200) support areas, which seem to be working their magic.

News and views

At a press conference yesterday, National Bank of Poland governor Glapinski (evidently) defended Wednesday’s surprise decision to cut the policy rate by 75 bps to 6.0%. August Polish inflation still printed at 10.1% Y/Y. However, according to Glapinski’s assessment, the rate cut was justified as Polish inflation was basically flat over the previous five months. He sees the condition of single digit inflation to be easily met in September (slightly above 8.5%). Recessionary trends in EMU will continue to curb inflation in Poland. The NBP governor expects inflation to ease to 6-7% by the end of the year and to fall further to 3.5% next year of in 2025. Glapinski also saw no inflationary impulse from the government budget. With respect to the zloty, he assessed that a 2.0% setback in the currency wouldn’t have a material impact in inflation and indicated that the currency might rebound after the election. The NBP currently has no intention to intervene in the FX market. He also formally rejected that the decision was politically inspired by the 15 October Parliamentary election. In a steepening move, the Polish to 3-y government bond yields dropped another 8 bps. The 10-y yield added 5 bps. The zloty sell-off continued as EUR/PLN closed at 4.62 up from 4.5675 on Wednesday evening and 4.4925 on Tuesday. Elsewhere in the region, Czech Central Bank Deputy governor Zamrazilova in an interview with newspaper Pravo indicated that the Czech National Bank is in no hurry to cut rates. The debate on the timing of a future rate cut is ongoing. For now it’s not clear whether the slowdown in inflation is caused by fading external shock or cooling domestic demand. A strong labour market in this respect still has the potential to support/revive the latter. Czech inflation might return to target next spring. A planned VAT change remains a source of uncertainty. Due to the fall-out from the NBP policy decision the Czech krona over the previous days dropped from EUR/CZK 24.19 on Tuesday evening to a close near 24.36 yesterday.