Markets:Slightly better-than-expected core US durable goods orders (July) featured an otherwise pale eco calendar. Capital goods shipments non-defense excluding aircraft, a proxy for investment in GDP calculations, rose by 0.7% M/M from an upwardly revised 0.8% M/M in June. Markets didn’t react to the release.
Today’s main trend was the persistence in core bond weakness. As has been the case more of late, UK Gilts underperformed German Bunds who on their turn underperformed US Treasuries. UK yields increased by 8.2 bps (30-yr) to 20 bps (2-yr).
UK money markets discount a cumulative 175 bps of rate hikes at this year’s three remaining policy meetings. That would bring the policy rate at 3.5% by year-end. An additional 100 bps of rate hikes is discounted at the first three policy meetings of 2023, after which expectations flatline near 4.5%. It’s a seismic shift compared to June/July when the idea was that the Bank of England (and other central banks for that matter) would slow down their tightening cycle by this year’s final policy meetings before keeping it stable over 2023 or even pondering a rate cut by end 2023. UK money markets discounted a flat 2.75% policy rate over 2023 only three weeks ago. What a difference a double digit inflation print makes…
The German yield curve bear flattens with yields rising by 3 bps (30-yr) to 7.7 bps (2-yr). EMU money markets for the first time discount a cumulative full percentage point rate increase at the next two ECB meetings with another 100 bps priced in by mid next year (2% deposit rate). Again for comparative reasons, we take a look at August 1st pricings: a 1% policy rate, hit early next year followed by a flat path afterwards.
The US yield curve becomes more inverse with yields 3.8 bps (30-yr) to 5.5 bps (2-yr) higher. US money markets discount a cumulative 125 bps rate hikes by the first meeting of next year (3.75%), but don’t completely abandon the idea of a rate cut by the end of the year. Early this month, the expected policy rate was 3.25% by year-end. Today’s core bond sell-off doesn’t spill to stock markets which fluctuate near opening levels in Europe and started flat in the US.
The risk aversion hierarchy plays on FX markets. The dollar outperforms with the trade-weighted greenback nearing the YTD high at 109.30. EUR/USD dives to the low 0.99 area. Sterling can’t hold its momentum despite the yield advantage with EUR/GBP a tad higher at 0.8430.
News Headlines:
The composite economic sentiment indicator of the Czech statistical office decline 1.6 point to 94.1 in August. The monthly dynamic for business confidence and consumers’ mood diverged. Business sentiment decreased 2.6 ppts to 97.6. The decline affected all economic subsectors with construction hit the hardest (110.2 from 118.6). The loss in trade, services and industry was more modest. Consumers turned slightly more optimistic/less pessimistic with the headline index rebounding from -33.0 to -29.8 after five months of consecutive declines. The share of respondents expecting a deterioration in the overall economic situation and their own financial situation over the next twelve months decreased. Still, consumers stay reluctant to spend money on large purchases. Consumers’ concerns on rising prices eased significantly, but remain high. Still, confidence is lower compared to the same month last year. The Czech korona today gains marginally but at EUR/CZK 24,64, the Czech currency is holding near the lowest levels since the early August MPC meeting. A further CZK decline is probably mainly prevented by CNB interventions.
The Hungarian Statistical Office reported total gross wages to have risen 1.5% M/M and 15.4% Y/Y in June. According to the office, previously scheduled wage increases, as well as the growth of the minimum wage and minimum wage for skilled workers mainly contributed to the increase in earnings. Real earnings growth was reported at 3.3%. The National Bank of Hungary meets next week. Persistent high inflation (13.7% in July), high wage growth and ongoing pressure on the forint are all good reasons for the NMB to continue its hiking cycle after raising the base rate by 1.0% to 10.75% end July. The forint gains slightly today but at EUR/HUF 411 stays near the all-time low of EUR/HUF 416.89 touched early July.
