Markets
Stock markets took center stage yesterday. The technical break in the EuroStoxx50 below the 4200 support zone on Monday got confirmed by another 0.9% drop on Tuesday. US indices didn’t escape reckoning this time. The Dow Jones (-1.14%), S&P (-1.47%) and Nasdaq (-1.57%) all tumbled below the neckline of a double top formation. This risk-off initially triggered some safe haven bids for core bonds. But yields at both sides of the Atlantic found a bottom in early afternoon before rebounding back towards their opening levels. The net daily changes of -0.4 bps (2-y) to +2.6 bps (20-y) in the US and -0.6 to +1bp in Germany thus hide bigger intraday moves. Disappointing US economic data (see below) weighed additionally. Peripheral spreads in Europe widened, with Italy a notable underperformer over the past few days/weeks. Bloomberg citing people familiar with the matter reported that Italy’s budget deficit for 2024 would amount to 4.5% instead of the 3.7% envisaged in April. It is also well above the EU’s 3% limit. This becomes the standard again in 2024 after a few years with a special (softer) deficit regime. PM Meloni’s government publishes an official update later today. The USD strengthened with the trade-weighted greenback edging further north of 106 to a new YtD high. EUR/USD’s poor attempt to retake 1.06 failed miserably and instead fell further to 1.0572. Another verbal warning from Japanese finance minister Suzuki didn’t convince the yen. USD/JPY eked out a gain to 149.07, slowly but steadily approaching the symbolic 150 barrier. The dollar holds the upper hand in Asian dealings this morning as well. We think it’s the path of least resistance, especially given there is little on the economic calendar (except the usually second tier durable goods data) that could change that in one way or another. A fragile risk environment, even if it’s not outright risk-off, may support the greenback as well. Next technical references in EUR/USD pop up at 1.0516, followed by the critical 1.0484 area. EUR/GBP is testing the 0.87 big figure for a fourth day straight now with spillovers from EUR/USD the only thing preventing a break higher for now. Yesterday’s intraday movement in core bonds suggest the sell-off eases. Core bond yields may now stabilize or even ease a bit going into tomorrow’s and Friday’s European/US inflation readings (CPI and PCE).
News and Views
US consumer confidence of the Conference Board and Richmond Fed manufacturing survey both gave somewhat of a similar message. Current activity shows ongoing signs of resilience but respondents are more cautious on the future. Headline consumer confidence eased to 103.1, but the August figure was upwardly revised from 106.1 to 108.7. Current conditions improved further from 146.7 from 147.1 while the expectations measure tumbled from 83.3 to 73.7. US consumers especially saw deteriorating business conditions, employment perspectives and income perspective over a six month horizon. Inflation expectations in 12 months were unchanged at 5.7%. The September Richmond manufacturing index improved from -7 to +5, with shipments, new orders, capacity utilization, wages and employment all showing higher readings in a monthly perspective. The prices paid indicator also again rose from 3.17% to 4.06%. Prices received eased marginally to 3.06%. However, the assessment for business six months for now was less optimistic with especially indices for shipments (12 from 22) and new orders (17 from 22) easing. Labour market forward looking indices remained solid. Expectations for price trends are expected to cool down.
Monthly CPI from the Australian Bureau of statistics reaccelerated to 5.2% Y/Y in August from 4.9% in July. The rises came after three consecutive declines and compare to a cycle top of 8.4% Y/Y in December last year. The indicator excluding volatile items (fruit and vegetables, auto fuel and holiday travel) still declined from 5.8% to 5.5%. Trimmed mean underlying inflation was unchanged at 5.6% Y/Y. The most significant price rises were housing (+6.6%), transport (+7.4%), food and non-alcoholic beverages (+4.4%) and insurance and financial services (+8.8%). Electricity prices rose 12.7% Y/Y, reflecting higher wholesale prices being passed on to customers. The rise even was tempered by the introduction of rebates from the Energy Bill relief Fund. Automotive full prices rose 13.9% Y/Y due to a 9.1%M/M rise in August. Both headline and core measures remain well above the 2-3% RBA target, keeping the debate on further tightening alive. The impact of the data on markets was limited. The 2-y Australian yield eased about 2.5 bps. Markets still see change of about 70% for a rate hike in Q1 next year. The Aussie dollar remains under pressure from a strong US dollar with AUD/USD trading near 0.6385.
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