Markets
Tuesday’s US sell-off had some fall-out during Asian dealings. AstraZenica announcing it pauses the testing phase of its vaccine weighed further on sentiment. The selling wave did ease somewhat compared to the US though. Equity losses varied from 1 to 3% whereas US stocks fell more than 4%. Europe even opened in green, despite having partially escaped deteriorating sentiment in the US later in the session yesterday. Stocks gain a solid 1%. Wall Street licks its wounds after yesterday (+1.7%, Nasdaq). Core bonds trade with a downward bias, the German Bund underperforming. The Bund extended (minor) losses after rumours that the ECB’s forecasts tomorrow are expected to show more confidence in the economic outlook. Other forecasts changes are most likely to include a downward revision to inflation. Real policy changes probably aren’t due. It makes sense to keep the remaining powder, if any, dry at least until the winter. Additionally, the bar for further easing is ever being raised, with more ECB governing council members other than the usual suspects (Weidmann to mention one) emphasizing the temporary nature of some measures (see headline below). German yields rise 1.1 bps (2-yr) to 2.8 bps (30-yr). Peripheral spreads tighten. Greece (-5 bps) outperforms. US yields have barely changed.
• The dollar had a quite session for most of the European trading day, moving within tight ranges against most peers. EUR/USD was just recovering from an intraday low at around 1.176 (down from 1.178) after the ECB headlines popped on the screen. EUR/USD jumped above the 1.18 barrier. This market reaction on a rather low-profile headline highlights Lagarde’s difficult task tomorrow. She’ll face questions about the euro exchange rate after Chief Economist Lane said last week “it does matter” when setting monetary policy. A not-dovish-enough tone has well the potential to propel the currency pair back north. EUR/USD is currently changing hands in the 1.182 area. The trade-weighted DXY declines marginally from 93.54 to 93.78 at the time of writing. USD/JPY as usual is going nowhere just north of 106. Sterling remained in the defensive. PM Johnson’s move over the weekend continued to trigger EU warnings, with diplomats urging to clarify his plans. The bill has been released to the public today and confirms what was known already; that it would override some key clauses in the withdrawal agreement. EUR/GBP extends yesterday’s rise. The couple is currently testing the 0.91 big figure. Cable initially tanked further below 1.30 to 1.29 but recouped all and more of the losses. GBP/USD eyes to reclaim 1.30.
News Headlines
The Hungarian inflation report (August) showed annual headline inflation at 3.9% y/y, core inflation at 4.7% y/y and core inflation adjusted for the effects of indirect taxed at 4.2% y/y. The latter is the central bank’s preferred price gauge and exceeds the upper end of the 1%-toleration band around the 3% inflation target. We expect core inflation to remain above 4% y/y in the next 6 months before moderating towards 3% by the final quarter of 2021. It might put pressure on the MNB to further calibrate its very easy monetary policy, especially should the forint weaken towards EUR/HUF 370. The central bank yesterday announced an FX swap facility to reduce end-of-quarter volatility, keep money market rates near the official rates and stem selling pressure on the local currency.
ECB Governing Council member Müller says that “A timely exit from temporary emergency measures as the economic outlook gradually improves is just as important as decisive policy action during the acute phase of a crisis,”. He additionally warns that “When temporary measures last longer, they may bring about structural changes that are not the expected outcome of the policy”. The comments downplay expectations about near term monetary policy changes despite Chief Economist Lane’s FX comments.
