Markets
Over the previous days, Fed and ECB policy makers advocating a protracted hiking cycle with yields to stay higher triggered a congruent sell-off in bonds and equities. Even with few important eco data on the agenda (except for the US manufacturing ISM to be published after finishing this report), this pattern basically continued today. German and EMU 2-y swap yields are little changed. Yields at longer maturities still ad up 6/10 bps in the 10/30-y sector. The 10-y euro swap yield just didn’t touch the 2.50% barrier. With a 75 bps ECB rate hike fully discounted for next week’s meeting, maybe there is a good case for investors at the very short end to move to somewhat of a more neutral positioning going into next week’s ECB meeting. The uptrend in yields temporarily ran into resistance at the end of the European morning session/early in US dealings. However, a better than expected US jobless claims (232k vs 248k expected) was already enough to restore the reigning dynamics. The US yield curve also bear steepens with yields adding 1 bps (2-y) to 7.5 bps (30-y). German power prices and oil (brent $93.85) are easing further. The Dutch reference gas contract maintained recent decline. Some other cyclical commodities (copper) also corrected further south. However, as this correction is mainly the result of a deteriorating prospect for global growth, it didn’t help to ease the risk-off mood on equity markets. The EuroStoxx50 is losing another 1.5%. US indices open with losses of up to 1.0% (Nasdaq). China announcing a new lockdown in the city of Chengdu only lengthened the already impressively long list of economic uncertainties.
Yesterday, the dollar didn’t fully profit from its safe haven status, at least partially due to some (short term) euro resilience. However, today the US currency again takes the lead. DXY (109.30) is revisiting the cycle top. USD/JPY (139.55) surpassed the July peak, trading at the strongest level since 1998. After a few sessions of relative calm, EUR/USD again dropped below parity (0.9985 currently). Persistent uncertainty on the energy crisis with the risk of a longer period of stagflation for now caps any sustained rebound of the single currency. EUR/GBP also takes a pause as after recent sharp rally trading at 0.8630 compared to an intraday top near 0.8670. The move probably is mainly euro weakness rather than the precursor of a sustained sterling comeback.
News Headlines
Swiss inflation quickened from status quo in July to 0.3% m/m in August. On yearly basis, this means prices are now 3.5% higher, a little more than the 3.4% expected. The Swiss National Bank in June delivered a surprise 50 bps rate hike to -0,25%. Its president, Thomas Jordan, warned last week that strong price gains may be here to stay, citing structural factors that could lead to persistently higher inflationary pressures in the coming years. He also said that pressures are spreading to goods and services that are not directly affected by either the pandemic or the war. Combined with today’s data, another increase in rates on September 22 seems a done deal. Doing so would mark the end of a 7-year era of negative rates. The Swiss franc marginally strengthened vs the euro following the CPI release. EUR/CHF is trading at 0.979.
Going into next week’s policy meeting, several National Bank of Poland policymakers have expressed support for another rate hike. Litwiniuk this morning called for 25 bps or more while his colleague Kochalski still sees room for additional tightening, but with moves smaller than previously (25 bps instead of 50 bps). Kotecki said that recent CPI developments (accelerating more than expected from 15.6% to 16.1%) mean another hike in September or October. He also cited the deterioration of the zloty in recent weeks and the fact that other central banks continue policy tightening as well. The Polish currency strengthened for a fourth day straight today. EUR/PLN (4.718) remains north of 4.70 support though.
