Market movers today
- Light day in terms of economic data. Preliminary Q3 GDP in UK will be released.
- The EU Commission will release its new macroeconomic forecasts, which should also include the latest country budget draft projections. These will be interesting in light of Commission’s plans to reform its budget rules by 2023, when they are supposed to apply again.
- From the central banks, ECB’s Lane will give a speech in the afternoon.
- China finishes their four-day plenum of the Central Committee of the Communist Party. A rare new resolution on the Communist Party’s history and path forward is expected to be released, which is likely to set the stage for President Xi Jinping getting a third term next year.
The 60 second overview
US Inflation: CPI data out of the US saw yet another strong upside surprise highlighting the risk that inflation will be more persistent than expected by the Federal Reserve, thus raising the probability of a faster tightening of monetary policy. The market now prices three 25bp hikes in 2022. Core inflation increased 0.6% m/m (consensus 0.4% m/m) taking the yearly rate to a new cycle high of 4.6%. The market response was clear with a jump in bond yields, equities selling off and the USD strengthening.
Global Inflation Watch: This morning we published Global Inflation Watch – Highest US wage growth in more than 10 years, where we go through inflation drivers globally with focus on the US and the euro area. Inflation pressures are growing in general but with key differences across the US and the euro area, not least on wages.
Joint US-China statement on climate: The US and China yesterday surprised and released a joint declaration on enhancing climate action in the 2020’s in which they recognized the need to do more on climate and working jointly and with other countries to strengthen and accelerate climate action. It was a rare moment of cooperation and positive to see the two sides being able to put other issues aside when it comes to climate action.
Evergrande: Supposedly the ailing Chinese developer Evergrande dodged another default yesterday by meeting a deadline of interest payments worth USD148.5m. In addition, a series of articles in state media indicate that measures are now being stepped up to ease the liquidity crunch and fend off a deeper crisis. Mortgage lending is loosened to support home sales, rules on developer’s debt issuance are eased and state banks take on more of the developer’s debt. Chinese developer shares have increased in response and high yield rates are falling.
Equities: Equities fell yesterday, once again with US setting the directions. Europe and Asia finished higher but Europe will have some catching up to do today as the drop in US stocks happened after the close of cash trading in Europe. One obvious candidate to blame, the +6% CPI print from US. With that in mind it is no surprise to see defensive, value, large cap and min vol stocks outperforming. It was more or less a textbook reaction taking place in the US even if it took a little time to unfold. In US, Dow -0.7%, S&P 500 -0.8%, Nasdaq -1.7% and Russell 2000 -1.6%. Maybe worth to note, albeit not surprising, the VIX moving higher for the fifth consecutive day. Asian stocks doing fairly well this morning in light of the US data and market moves yesterday. US futures are mixed while European futures are lower.
FI: The US CPI figure drove global yields significantly higher yesterday with steeper curves and wider spreads. 10y Bunds rose 5bp, while the BTPs-Bund spread widened 4bp on the day. Ahead of the US CPI figure, the EGBs were already trading heavy, influenced by a headline on Merkel’s advisors calling for an ECB normalization strategy, but the sell-off accelerated after the US release. On the day as a whole, the front end repriced 5bp (Dec22 Euribor). The 10y Bund ASW spread widened 2bp to 44bp yesterday. €STR pricing point to an ECB hike priced for September next year.
FX: USD rose on a broad basis yesterday after US CPI inflation rose much more than expected. EUR/USD dropped below 1.15, USD/JPY rebounded back towards 114 and GBP/USD fell close to 1.34. Scandies also weakened following the rise in USD.
Credit: Credit was somewhat mixed yesterday. iTraxx Xover widened 2.8bp and Main 0.4bp. HY bonds, on the other hand, were marked 2bp tighter and IG 1bp tighter.
