Markets
The heavy UK Gilt sell-off triggered a response by the Bank of England. They consider the repricing, especially at the very long end of the curve, as a material risk to UK financial stability especially should dysfunction in the market continue or worsen. In order to restore market functioning and reduce any risks from contagion to credit conditions for UK households and businesses, the BoE will carry out temporary purchases of long-dated UK bonds on whatever scale is necessary. The UK central bank also decided to postpone by one month last week’s decision to actively conduct gilt sale operations (QT) with the aim of reducing the (QE) stock by £80bn annually (sales + redemptions). To put things in context: the BoE launches some kind of operation twist in the midst of its normalization cycle which should heavily invert the UK Gilt curve and highlights difficulties central banks run into following years of lavish policy easing. Putting the pedal to the metal while slamming the breaks. The UK 30-yr yield drops a full percentage point on a daily basis after rising from 3.5% to over 5% since last week’s mini budget by UK Chancellor Kwarteng which caused the troubles. The UK 2- and 10-yr yields drop 31 bps and 44 bps respectively. Sterling temporary lost out on the decision with EUR/GBP spiking from 0.8950 to 0.9050, before returning to 0.90.
ECB talk filled today’s agenda. ECB Lagarde struck again a hawkish tone: “Our primary goal is not to create a recession. Our primary objective is price stability and we have to deliver on that. If we were not delivering, it would hurt the economy far more.” Therefore additional rate hikes are necessary at the next several meetings. ECB Rehn called a 50 bps hike in October the minimum while hawkish ECB Holzmann thinks its too early to accelerate to a 100 bps move. Markets discount the in-between repeat of the 75 bps September rate hike. By the end of the year, ECB rates will hit neutral levels, allowing for the a start of QT (balance sheet roll-off) which should be part of the normalization process as well. EU interest rate markets trade extremely volatile today with hourly swings of 10 bps more rule than exception. If any, we reckon an intraday outperformance of the front end of the curve. We also retain the German Finanzagentur announcement to increase Q4 bond issuance by €10.5bn to €47.5bn. Real rates remain the driver at the (very) long end of the curve. The German 10-yr real yield closes in on positive marks for the first time since 2014. The US 10-yr real rate exceeds 1.5% for the first time since 2011. Both are testament to markets embracing that central banks won’t backdown if economies hit recessions and that restrictive policies will be with us for way longer than originally expected. Weaker stock markets (-0.5%) and a (slightly) stronger dollar remain part of the current market playbook.
News Headlines
The economic tendency index of the Swedish Konjuntur Institutet dropped 6.4 points in September to 90.8. All sectors contributed to the decline. Consumer confidence fell further to a new record low. All questions included in the indicator contributed to the decline, in particular how consumers view the outlook for their personal finances over the coming year. The confidence indicator for the manufacturing industry dropped 5.7 points to 110.0 and has now fallen for four months in a row. The confidence indicator for the retail shows a much weaker situation than normal and this is also the case for the services sector, even as employment plans remain optimistic. Poor domestic demand was illustrated by a further decline in August retail sales (-0.4% M/M and -5.1% Y/Y). Despite a sharp deceleration in activity, the Riksbank last week raised its policy rate by 1.0% to 1.75. The central bank also suggested that the peak policy rate next year could be 2.5%+ rather than 2.0% guided in June. The SEK 2-y swap over the previous days rose further to 3.5%, in line with the repricing in EMU. At EUR/SEK 10.90, the krone continues to trade near the weakest levels since the spring of 2020. On a separate topic, the Swedish national debt office said it proposes to gradually phase out foreign currency exposure of the central government debt. Analysis of the debt office concluded that currency exposure involved a higher risk without lowering the cost over time.
