Markets
Daily changes in European and US interest rate markets were modest compared to what we got used to of late. US yields eased between 1.5 bps (2-y) and 5.25 bps (5-y). Investors clearly didn’t want to place big directional bets ahead of today’s key US inflation report. A $32bn 10-y Treasury auction tailed substantially, suggesting only mediocre investor interest. Still the impact on markets remained modest. The Minutes of the September Fed policy meeting indicated that most Fed officials agreed that the cost of doing too little could turn out much higher further down the road. At the same time, some more dovish oriented members advocated to calibrate the pace of rate hikes as risks are mounting. An earlier rise in EMU/German yields with especially longer tenors setting new cycle peak levels also evaporated. German yields finally eased about 1 bp of maturities up to 10-y. The 30-y yield maintained a gain of 5.5 bps. On the UK bond market, there was a remarkable decline of short-term yields (2-y -27,4 bps). Yields at longer maturities were little changed as the Bank of England bought the biggest amount of LT bonds (including inflation linked bonds, total amount £4.56 bn). Even so, the tensions/conflicts of interest between the BoE and the government persists. The BoE’s Bailey apparently wants the temporary buying scheme to end this week. At the same time, UK Fin Min Kwarteng warned the BoE will be responsible for market volatility after the end of the program. Despite this stalemate/collision course between the BoE and the government, sterling yesterday rebounded. EUR/GBP dropped from the 0.885 area to close near 0.874. On the broader FX market, the dollar maintained recent gains against most majors (close DXY 113.3, EUR/USD 0.9705). USD/JPY was the exception to the rule. Only a whisker away from the 147 big figure, the pair again nears the 1998 peak, with markets looking for new MOF interventions to block further yen losses.
US CPI inflation evidently takes center stage today. For the headline figure, a modest easing from 8.3% to 8.1% Y/Y is expected. However, the dynamics of core inflation is expected to stay elevated at 0.4% M/M and 6.5% Y/Y (from 6.3%) with rent probably a key driver. Last month, an upward surprise only confirmed the Fed’s case to bring monetary policy clearly in restrictive territory, reinforcing a the established up-leg in yields. However, given recent hawkish Fed communication, this message should already to a large extent be discounted by markets. An upward surprise for sure will cause additional volatility. However, we are especially keen to see the market reaction in case of an in-line/softer than expected figure. Is there any room for consolidation after the recent rally in core yields and the dollar? This is especially the case as US (e.g 2-y & 10-y) yields are testing key technical resistance levels.
News Headlines
The ECB is eyeing a decision at its next policy meeting on changing the rules on TLTRO’s. The central bank wants to by-pass that cheap loans it has granted during previous crisis years to kickstart the economy get rerouted to its own deposit facility which all of a sudden looks very attractive following back-to-back large rate hikes (with more to come). Sources suggest that three possible options remain. The first and most simple one is unilaterally changing the terms of the TLTRO’s so that cash from the operations parked at the ECB would not be remunerated at the deposit rate. A second possibility consists out of treating TLTRO cash in the same way as minimum reserves, which are currently remunerated at 0.5%, below the 0.75% deposit rate. The final solution is some sort of reverse tiering that would allow for a more favourable remuneration up to a certain threshold, after which a lower rate would apply.
Russian President Putin suggested to transfer to the Black Sea the lost Nord Stream volumes that used to be transited across the Baltic Sea. The comments came ahead of a meeting with Turkish President Erdogan with Russia considering building more subsea natural gas pipelines to Turkey. An extra gas hub could be used to supply Europe, Putin suggested. He also hinted at using the Nord Stream 2 pipeline which is blocked from entering service by Germany.
