Markets
The first trading day of the week went by without much ado, apart from a lot of corporate supply. In its summer forecast update, the European Commission as expected downwardly revised its 2023 (0.8% from 1.1%) and 2024 (1.3% from 1.6%) growth forecasts as consumption is still held back by the ongoing increase in prices for most goods and services even as the labour market stays strong. The EC slightly reduced the EMU 2023 inflation forecast from 6.7% in the spring update to currently 6.5%. However, a sustained return of inflation to the 2% ECB target isn’t in the cards yet with the 2024 outlook put slightly higher at 3.2% (from 3.1% ). The NY Fed’s August Survey of Consumer Expectations showed 1-yr and 5-yr ahead inflation expectations both increasing by 0.1 percentage point to 3.6% and 3% respectively. Conversely, the 3-yr ahead inflation expectations decreased from 2.9% to 2.8%. Median home price growth expectations rose to the highest since July 2022 (3.1% from 2.8%) while US households continue to expect decent income growth in the year-ahead (2.9% from 2.8%). The mean probability of losing one’s job in the next 12 months rose from 11.8% to 13.8%. Finally, households turned less optimistic about their financial situation (expected income growth, household spending, credit access, outlook). The US Treasury kicked off its mid-month refinancing operation with an average $44bn 3-yr Note auction which was awarded at the highest yield since 2007. The bid cover was average (2.75) with the auction stopping tailing slightly (4.66% vs 4.65% 1 pm bid yield). The Treasury continues today and tomorrow with closely-watched 10-yr Note ($35bn) and 30-yr Bond ($20bn) auctions.
In subdued trading, US yield changes ranged between flat (2-yr) and +3.4 bps (30-yr). German yields added 1.9 bps (2-yr) to 3.7 bps (30-yr). Main European and US stock markets gained around 0.5% with Nasdaq outperforming (+1.15%). EUR/USD moved away from the 1.07 big figure to close near 1.0750 with EUR/GBP ending almost unchanged at 0.8590. We retain comments by hawkish BoE Mann who said that holding rates constant at the current level risks enabling further inflation persistence which will have to be unwound eventually with a worse trade-off (even tighter policy with repercussions for the economy). This morning’s UK labour market data (disappointing & decreasing employment, accelerating wage growth, limited GBP-gains) and German ZEW investor confidence are today’s sole economic releases. Tomorrow’s US CPI and Thursday’s ECB meeting are the main events.
News and views
New Zealand updated its economic and fiscal forecasts going into the October 14 general election. Treasury expects a much larger deficit this fiscal year (ending in June 2024) of NZ$11.4bn compared to the NZ$7.6bn gap predicted in May. It also postponed the return to a surplus by one year, in 2027. The country’s debt ratio is expected to peak at 22.8% in 2025 before falling to 21% two years later. Finance Minister Robertson of the ruling Labour Party said the budget worsening still reflects the costs of the pandemic and cyclone Gabrielle – New Zealand’s costliest nonearthquake natural disaster – earlier this year. A deterioration in global growth, and China in particular, meanwhile weighed down on government’s tax revenues and will continue to do so for some time. Economic growth has nevertheless been revised upwards to 1.3% by mid-2024. Unlike the country’s central bank, Treasury believes another recession can be avoided (q/q GDP growth was negative in Q4 2022 and Q1 2023). Inflation is expected to fall below 3% and thus re-enter the central bank’s 1-3% target by the end of next year. The Labour Party and the main opposition National Party are parting ways in recent polling to the disadvantage of the former.
The International Energy Agency for the first time said global demand for oil, natural gas and coal will peak before 2030, dubbing it “the beginning of the end” of the fossil fuel era. The updated forecast brings the peak date forward because of the accelerated rollout of renewable technologies and the spread of electric vehicles in the past year. Increased responsiveness to climate change as well as the energy crisis following the Russian invasion sparked green investments. IEA head Birol said that to limit global warming to 1.5°C, emissions needed to fall rapidly after a peak in the mid-2020s. Birol also noted structural shifts are going on in China as its economy is moving from heavy, oilconsuming industry to less energy-intensive sectors and services. According to the IEA chief, China in the last 10 years accounted for a third of the growth in global natural gas demand and two-thirds of the growth in oil.
