Market movers today
- Rising inflation expectations have been driving the market lately, and Wednesday could provide some interesting insights into that story. Today, we get the details from September HICP release in the euro area, giving more clues what drove the surge in core inflation to 1.9%.
- Also in the UK, the CPI inflation for September will attract attention given Bank of England hawkishness.
- In the US, the Fed Beige Book will shed some light on current economic conditions across states, while governors Kashkari and Quarles are due to speak.
The 60 second overview
Risk sentiment remains positive: Risky assets continued to perform yesterday, while government bond yields rose despite weakening global growth outlook, rising inflation fears and rate hike bets across most central banks. With fading fiscal support, ongoing supply shortages and downside risks to Chinese growth, we could see further downward revisions to global growth projections from here, which could end up being a challenging environment especially for manufacturing currencies such as SEK or EUR. Read more in FX Strategy – Time to cut global growth forecasts, 19 October.
China: The People’s Bank of China left the Loan Prime Rate unchanged overnight as broadly expected. While the PBOC has not yet given much signal about further easing since the Reserve Requirement Ratio was cut back in July, we still think further cuts to RRR are likely amid the fading growth outlook. New Home price growth for September, also released overnight, stalled for the first time since the beginning of the pandemic (from +0.2% m/m in August). While slowing credit growth is the key driver explaining slower housing price growth, rising uncertainty towards property developers also weighs on home sales.
Energy: Oil prices have moved slightly lower overnight after the Chinese government noted it is looking for ways to limit the recent rise seen in coal prices. China could set price limits for important goods such as coal, and separately the authorities noted that they look to crack down on possible speculation on commodity prices and ensure full capacity at Chinese coal mines. China is heavily reliant on thermal coal, which accounted for 57% of the country’s energy production in 2020.
Equities: Equities continued to edge higher on Tuesday, marking a fifth straight day of gains in the US. Quality, growth and defensives were the preferred styles as investors picked up last month’s losers. Among sectors, health care, consumer staples and tech were in the lead. Dow 0.6%, S&P500 and Nasdaq 0.7% and Russell 2000 0.4%. Asian markets are mixed this morning and US futures have dipped to negative.
FI: Global bond yields once again rose on the back of the risk that the rise in inflation is more permanent than transitory. Hence, both the 5y5y EUR and USD forward inflation rates are close to 5-year highs, and the 5y5y EUR inflation rate is close to 2 %. Furthermore, it was a traditional bearish steepener with 30Y German government bond yield rising some 6bp, while 10Y was rising 4bp.
FX: Reflation sensitive currencies in the likes of NOK, AUD and NZD remains the big outperformers in G10 space at the expense of not least USD and JPY. EUR/USD remains above 1.16 while EUR/GBP is approaching new lows. EUR/NOK has tested the low 9.70s while EUR/SEK seems to have found near-term support around the 10.00 figure.
Credit: Credit remained in good demand yesterday. iTraxx Xover tightened 4bp (taking it to 254bp) and Main 0.7bp (to 50bp). HY bonds tightened 1.5bp while IG closed widened 0.5bp.
Nordic macro
In the afternoon, Riksbank vice governor Per Jansson attends a panel discussion on inflation. The Riksbank narrative is that the surge in inflation will be temporary and yesterday Stefan Ingves said in the Riksdag Finance Committee that they see no signs of second round effects. This view will probably be echoed by Jansson. This morning, and related to inflation discussion, we have the release of NIER’s yearly Wage Formation Report.
