Markets
UK Gilts outperformed yesterday following the latest labour market report. Job losses and a fresh uptick in the unemployment rate (4.3%, highest in 2 years) outweighed accelerating wages. It strengthens the UK stagflation case in which the Bank of England will soon err on the dovish side of expectations. A (final?) 25 bps rate hike at next week’s policy meeting is still the base case though. UK Gilt yields lost 4.5 bps to 5.5 bps with the belly of the curve slightly outperforming the wings. Damage for sterling remained modest with EUR/GBP closing just below minor resistance at 0.8611. Cable closed at 1.2490, holding just above the recent sell-off low (1.2446).
German Bunds underperformed as investors placed some final bets on the outcome of Thursday’s ECB meeting. Though finetuning in nature, money markets now attach a >50% probability to a 25 bps rate hike; our preferred scenario. There was no economic news to drive the move. German yields eventually added up to 2.8 bps at the front end of the curve. German Bunds opened significantly weaker as well this morning after news agency Reuters reported that the ECB’s updated quarterly projections will put inflation north of 3% in 2024. That’s both above the 2% inflation target and above the 3% forecast from June, bolstering the case for a rate hike over a skip even as growth loses momentum. The same source said that growth prognosis will be downgraded for this year (0.9% in June) and next year (1.5%). EUR/USD spiked higher on the report, from 1.073 to 1.076 to currently change hands near 1.075.
US yield changes varied between +3.1 bps (2-yr) and -2.1 bps (30-yr). The US Treasury’s $35bn 10-yr Note auction was awarded at 4.289%, het highest since 2007 and spot on the 1:00 PM bid yield. The bid cover was in line with recent average (2.52). The Treasury ends its refinancing operation tonight with a $20bn 30-yr Bond auction, but today’s focus goes to US inflation numbers. August headline CPI is expected at 0.6% M/M and 3.6% Y/Y (up from 3.2% Y/Y) with core CPI prognosed at 0.2% M/M and 4.3% Y/Y (from 4.7% Y/Y). We believe that an upward surprise won’t alter Fed plans to keep policy rates stable at next week’s meeting. In such scenario, it could even be the longer end of the curve which underperforms. As a WSJ article suggests today: “for the past year, officials have placed the burden on evidence of a slowing economy to justify pausing rate increases. As inflation cools, the burden has shifted toward evidence of an accelerating economy to justify higher rates.”
News and Views
House Speaker Kevin McCarthy launched an impeachment inquiry into President Biden yesterday. The probe centers on whether Biden benefited from his son’s business dealings in Ukraine and elsewhere. “These are allegations of abuse of power, obstruction and corruption, and warrant further investigation by the House of Representatives,” McCarthy said. The move is seen as addressing demands of some Republican hardliners that have supported McCarthy as Speaker in January but could now move to oust him if their requests are denied. Whether the inquiry will lead to an actual vote is highly uncertain. And even if it does, it’s unclear it will get enough backing in the House (let alone the Democratic-led Senate), where Republicans hold only a thin majority. Some moderates have already expressed unease with the probe. The impeachment procedure can also be linked to a potential government shutdown by September 30. Some Republicans threatened to vote against funding for the government unless McCarthy proceeded with the inquiry.
The European Parliament yesterday voted to increase the share of renewable power in its energy mix from 30% to 42.5% by 2030. It’s a significant rise that comes with France dropping opposition after securing some concessions for a better recognition of nuclear power – which makes up about 75% of its own energy mix. Legislators also decided to loosen permitting procedures for renewable energy projects. With it, they aim to unlock about 130 gigawatt in pending investments that currently await European approval. Yesterday’s decision follows the G20 summit last weekend, where it was decided to triple green energy capacity by 2030.
 with core CPI prognosed at 0.2% M/M and 4.3% Y/Y (from 4.7% Y/Y). We believe that an upward surprise won’t alter Fed plans to keep policy rates stable at next week’s meeting. In such scenario, it could even be the longer end of the curve which underperforms. As a WSJ article suggests today: “for the past year, officials have placed the burden on evidence of a slowing economy to justify pausing rate increases. As inflation cools, the burden has shifted toward evidence of an accelerating economy to justify higher rates.”){kind=link}