Markets
UK August inflation numbers this morning fell short of analyst expectations. The headline figure only rose by 0.3% m/m, unexpectedly lowering the yearly reading from 6.8% to 6.7%. Core inflation (ex. food and energy) eased from 6.9% to 6.2% compared to the 6.8% consensus. All other consumer prices gauges (CPIH, retail price index) similarly showed prices rising less than expected. The numbers come a day ahead of the Bank of England and follow a recent string of disappointing data, including PMIs. Markets since end August significantly pared back bets up to a point where the once almost 75 bps of additional tightening is reduced to a less than 50% chance for one final hike at the meeting tomorrow. Given the Bank of England’s reputation of erring to the dovish side there’s a real risk it is going to (ab)use this morning’s data not just to pause but to conclude, though not officially, the tightening cycle. UK gilts hugely outperform US Treasuries and German Bunds today. Yields tank more than 11 bps at the front end of the curve. Longer tenors shed 5.5-9 bps. Knock-on effects pushed German and US yields lower. They ease about 2 to 3.5 bps. Pound sterling declines but nothing dramatic, especially given the size of the yield declines. EUR/GBP rose from 0.862 to the mid 0.86/87 area. The dollar trades slightly weaker, giving EUR/USD another shot at the 1.07 big figure. DXY (trade-weighted greenback) eases marginally to trade sub 105. USD/JPY temporarily moved beyond the recent highs and went north of 148 before paring gains again. Other currencies including the AUD, SEK and NZD lead the scoreboard. These cyclicals enjoy a healthy risk bid as markets bet that yet another major central bank is (almost) done tightening. That brings us to tonight’s Fed policy meeting.
The Fed is expected to deliver a telegraphed, but still hawkish skip (5.25%/5.50% target range). However, with the decline in headline inflation at risk of slowing down, amongst others, due to a higher oil price and US economic growth holding up well, there is little reason for Fed governors to change the dot plot signaling an additional 25 bps step later this year. The higher for longer mantra might be reinforced by a further scaling back of rate cut expectations for end 2024 (4.6% in June). Fed governors also might raise their standing assessment on the 2.5% long term equilibrium rate. If so, it would be a clear confirmation that monetary policy has entered a new era. At the press conference, we don’t expect Fed Chair Powell to change his message from June in a profound way. From a bond market point of view, question is whether the tone of the Fed will be hawkish enough to force a break beyond recent cycle yield peak levels. The downside in yields in any case should stay well protected. The dollar will likely stay in the drivers’ seat.
News & Views
New EU car registrations rose by 21% Y/Y in August, marking the thirteenth consecutive month of growth. YTD, car registrations rose by 17.9%, totaling 7.1 million units. The market share of battery-electric cars exceeded 20% for the first time (21%, up from 11.6% in August last year), overtaking diesel for the second time this year and becoming the third-most-popular choice for new car buyers after hybrid-electric cards (24% market share from 22.5%) and petrol cars (32.7% from 38.7%). EU battery-electric car registrations surged by 118.1% Y/Y with Belgium recording the highest growth rate of 224.5%.
Polish central banker Wnorowski followed up on this morning’s comments by governor Glapinski. He said that the zloty’s drop since the unexpected 75 bps rate cut has been excessive and that a further weakening is not desirable. He added that the central bank learned its lesson and that any next moves will be more gradual. He hopes that November forecasts will show a faster decline of CPI towards target, backing such approach. The Polish zloty in a two-stage move rallied from EUR/PLN 4.6750 this morning to 4.61 currently. Polish zloty swap yield rise by up to 13 bps at the front end of the curve (2-yr).
 eased from 6.9% to 6.2% compared to the 6.8% consensus.){kind=link}