Markets:
Friday’s market trends persist today in absence of eco data and with numerous central bank meetings lined up later this week (Fed, BoE, Norges Bank, Riksbank, SNB, BoJ). Key European stock markets lose over 1%, copying WS’s performance. The strike by the United Auto Workers union at the big three automakers (GM, Ford & Stellantis) for higher pay and other benefits is getting more and more attention and pulls the companies’ stocks lower. Core bonds face new selling pressure with the front end of the curves underperforming this time. US yields add 4 bps (2-yr) to 1.3 bps (30-yr). The US 2-yr yield (5.07%) is closing in on the 5.15% cycle high. The US 10-yr yield is already testing this reference at 4.35%. German yields today rise by 4.1 bps (5-yr) to 2.4 bps (30-yr). The German 10-yr yield (2.71%) has the 2.77% cycle top in sight with the German 30-yr yield (2.85%) currently at the highest level since end 2011. EUR/USD is going nowhere near 1.0670. ECB vice-governor de Guindos said that underlying inflation’s worst moment has passed and that it should moderate. However, rising energy prices add another element of uncertainty. Brent crude currently trades just below $95/b. The ECB’s September inflation forecasts imply an average oil price of $90b in the final 4 months of this year. ECB Kazimir hopes that last week’s rate increase is the final one, though he can’t rule out the possibility of others. Only the ECB’s March 2024 forecasts can confirm that inflation is heading unequivocally and steadily toward the 2% goal. If the ECB rates were at a top, it will be necessary to stay there for quite some time and spend the winter, spring and summer there, according to Kazimir. He says that the debate is now open to adjust the pace of quantitative tightening but wouldn’t touch the control buttons for the next six months.
The Belgian debt agency today raised a combined €2.3bn at its OLO auction by tapping OLO 97 (€1.31bn 3% Jun2033) and OLO 98 (€0.99bn 3.3% Jun2054). The auction bid cover (1.5) was weaker than at this year’s earlier taps. The richening of OLO’s following the debt agency’s bumper €22 bn retail note earlier this month is a probably cause. The debt agency now raised a total amount of €40.21bn of OLO funding compared to this year’s (downwardly revised) target of €42.1bn (95.5%). Separately, the Flemish community today announced near term syndicated benchmarks of a conventional short 9y bond (Jun2032) and a sustainable 19y bond (Sep2042). Flanders so far raised €1.53bn via regular benchmarks (vs €2.25-2.75bn official target). In their funding plan, they aim to raise between €1.25bn and €1.5bn via sustainable benchmarks. Private placements and short term funding should help bridge the remaining gap of this year’s total €8bn financing need.
News & Views:
After feeling substantial collateral damage in the wake of the unexpected 75 bps rate cut of the National bank of Poland (NBP), the Czech koruna succeeded a nice comeback today. The rebound comes after CNB Governor Michl in an interview with CNN Prime News yesterday dismissed calls for an early rate cut. The CNB governor indicated that a rate cut at the September (27) meeting is not at all on the table. Inflation came down to 8.5%, but was still labeled as being extremely high. He also assessed that core inflation is expected to remain at 3% or more which doesn’t allow to lower the policy rate. To make up its mind on the timing of a first rate cut, CNB will wait for further data, e.g. at the November policy meeting. The CNB governor also indicated to keep a restrictive monetary policy until it will be certain that inflation will stay around 2%, not only in the first half of 2024 but also thereafter. The Czech 2-y swap yield jumped about 10 bps at the open this morning but currently (5.14%) trades only 5 bps higher compared to Friday’s close. EUR/CZK dropped from the 24.57 area to currently trade near EUR/CZK 24.40.
The NBP today published its core inflation measures for the month of August. Polish inflation excluding food and energy prices printed at 0.3% M/M and 10% Y/Y from 0.2% M/M and 10.6% in July. Inflation excluding administered prices slowed from 9.6% to 8.9%. Inflation net of the most volatile prices slowed from 13.7% to 12.7%. Markets are closely monitoring Polish inflation data after the NBP’s 75 bps rate cut, leaving the Polish currency with a substantial negative real rate. EUR/PLN found a new short-term equilibrium near EUR/PLN 4.65 (currently 4.64) from levels near EUR/PLN 4.46 before the surprise rate cut.
