Markets:
Global (interest rate) markets today were looking for direction after several high profile yield levels were touched earlier this week (3% German 10-y, 5% 30-y US yield). A softer than expected ADP job growth yesterday and a substantial correction of the oil price (brent $84/b this morning from a peak of $97+/b last week) were a good reason for investors to take a more cautious approach going into tomorrow’s key US payrolls report. However, don’t call it a correction yet. The only market relevant US data series, the weekly jobless claims at least didn’t support yesterday’s ‘correction’. Claims stayed at a very low207k. Yields briefly ticked up, but currently again trade near pre-claims levels. The belly of the US curve outperforms (5-y -5 bps). The 30-y still adds 1 bp. The German curve shows a similar pattern, with the 2-y/5-y easing about 2.5 bps but the 30-y rebounding 1 bp (was even higher earlier today). Intra-EMU 10-y spreads versus Germany stay near/at recent peak levels. The 10-y Italian spread (+4 bps revisits the 2% barrier). The tentatively more benign (or is it less negative) sentiment on bond markets slowed the equity down leg. However, with the EuroStoxx 50 ‘gaining’ 0.3% and US indices opening little changed, it’s much too early too call a risk-rebound. Sentiment and the technical picture in most major equity indices remain fragile, to say the least. For example a return of the EuroStoxx 50 above the 4200 previous range bottom for now doesn’t look that evident.
A fragile/cautious underlying risk sentiment explains ongoing USD resilience. Which currency presents itself as alternative for the reference currency carrying a 2%+ long term real yield combined with economic outperformance? At 106.75, the tradeweighted DXY easily holds within the established uptrend channel since mid-July. EUR/USD (1.0525) struggles to prevent a relapse below the 1.05 big figure. Commodity/oil related currencies especially stay in the defensive. USD/CAD intraday touched the 1.378 area, the weakest level for the loonie since March. EUR/NOK rebounds to revisit the EUR/NOK 11.60/62 resistance. AUD/USD (0.634 area) also remains within striking distance of YTD low (0.6286) touched earlier this week. The Swiss franc is looking for a ‘bottom’ after the end September correction (EUR/CHF 0.965). EUR/GBP is holding a tight range, close too, mostly slightly above 0.865. BoE deputy Governor Broadbent indicated that he sees clear signs that the economy is weakening including ‘the beginning of some rise in unemployment’. His comments suggest that the bar for additional BoE hiking is becoming ever higher.
News & Views:
The Bank of England published its Monthly Decision Maker Panel data for September today. The DMP is a survey of CFO’s at UK firms. Firms reported that their output prices rose by an average annual rate of 7.4% in the three months to September, unchanged from August. They expect output price inflation to be 4.8% a year-ahead (down from 5%). One-year ahead CPI inflation expectations increased slightly to 4.9% (up from 4.8%). Three-year ahead CPI inflation expectations remained flat at 3.2%. Current perceived CPI inflation was 7.1%, compared to an official ONS figure of 6.7%. Expected year-ahead wage growth remained unchanged at 5.1% on a three-month moving average basis, down from 6.9% realized wage growth for the three months to September this year. 51% of firms reported that the overall level of uncertainty facing their business was high or very high, marginally lower than 53% in August. Finally, they indicated that the average interest rate that they were paying on their borrowing was 6.6% (from 6.2%) with a year-ahead expectation of 6.3%. Overall, the DMP survey suggests that the BoE better continues to keep a close eye on price (expectations) before calling victory too early.
The WTO lowers its trade growth forecast for this year amid a global manufacturing slowdown. Projections have been scaled back amid a continued slump that began in Q4 2022. The effects of persistent inflation and tighter monetary policy, togethers with strained property markets in China and consequences of the war in Ukraine all cast their shadow. The volume of world merchandise trade is now expected to grow by 0.8% this year (vs 1.7% forecast in April). The 3.3% growth estimate for 2024 remains nearly unchanged.
