Markets
Central bankers of late stressed that the pace of further tightening will be guided by incoming data. In this narrative, yesterday’s higher than expected US inflation challenged markets’ expectations (or was it simply hope?) that there is a case for the Fed to turn less aggressive on its anti-inflation campaign. If inflation stays higher for longer, the peak policy rate also remains subject to debate. Markets after the US CPI release pondered whether that peak Fed policy rate shouldn’t be 4.50% rather than 4.25%. Today’s news flow at least gave no reason to backtrack on yesterday’s repositioning. US yields are gaining an additional 4 (2-y)/2 (30-y) bps. At 3.80%, the 2-y yield set a new cycle top. US 10-y yield (3.45%) is coming ever closer to the 3.50% mid-June peak. The 10-y real yield stays just south of 1.0%. The repricing on European interest rate markets also continued unabatedly. EMU swap yields are gaining another 6.5 bps (2-y) to 2.0 bps (10-y). The 2-y intraday attacked the next key reference (2.49% 2011 top). European money markets gradually consider the idea that the terminal ECB rate for current cycle might be north of 2.5%. EC president Ursula Von der Leyen reconfirmed the EC’s intention to tax revenues of low cost power producers. The EC also tries to hammer out a mechanism to cap gas prices and intends to reduce demand. For now, interest rate markets apparently don’t see how this might help to cool down EMU inflation. UK yields are lagging the moves in the US and EMU. UK August inflation (headline 9.9%, core 6.3%) was as expected. Markets still try to find out the BoE’s reaction function as government measures capping firms’ and consumers’ energy bills will drastically slow inflation, admittedly at the expense of a huge fiscal effort. European equities cede about 1.0% (EuroStoxx 50), but stay away from the August low. US indices open little changed after yesterday free-fall.
Relative calm returned to FX markets after yesterday’s sharp USD rebound. The USD DXY index fails to regain the 110 handle (109.50). In a similar move, EUR/USD tries to recapture parity. Even so, yesterday’s setback suggests that any sustained EUR/USD rebound won’t be easy with US real yields supporting USD attractiveness. USD/JPY retreats from the 145 area as the BOJ checking FX rates was seen as a last warning before starting FX interventions to slow the yen’s free-fall. UK inflation didn’t change the picture for sterling trading. Monday’s rejected test of the key EUR/GBP 0.8721 level inspires some further return action back in previous trading range (currently 0.87665).
News Headlines
Swedish August inflation exceeded estimates. Headline CPI printed at 9.8% Y/Y (1.8% m/m), up from 8.5% and more than the 9.6% expected. Using a fixed interest rate (CPIF), inflation accelerated from 8% to 9%. CPIF excluding energy – the Riksbank’s preferred measure – was the only gauge that didn’t top expectations. Nevertheless it sped up from 6.6% to 6.8%. Intensifying price pressures have already upped the ante for the September Riksbank meeting (Sep 20). Anything less than a 75 bps hike would come as a disappointment. But as the ECB also raised the stakes, the Swedish krone barely profited from the upcoming interest rate support. EUR/SEK is trading near recent highs around 10.67.
Officials close to the matter said the European Commission plans to back recommendations to cut funding to PM Orban’s Hungary on Sunday. It’s the next step in a drawn out legal process over concerns about corruption and the rule of law. EU governments will then make a final decision within three months. It takes a qualified majority of the member states for the EC’s proposal to take effect. Right now, some €40bn in EU financing is blocked. The Hungarian government recently offered to set up an anti-graft agency and to push through changes to public procurement legislation. The EC is said to tell EU leaders to give Orban some time to make good on these pledges. The Hungarian forint greatly underperforms peers following the report. EUR/HUF surges 4 big figures to 403.80.
Belgium successfully launched its second green government bond via a bank syndicate today. The April-2039 dated bond carrying a 2.75% coupon attracted market interest of more than €32bn of which the Kingdom eventually raised €4.5bn. Price was set 6 bps above the conventional 1.9% June 2038 OLO.
