Markets
An eerie calm over bond markets yesterday ended abruptly. Yields suddenly shot up, erasing the few basis points they lost up until that moment. Moves in the US ranged between +4.4 and +8.3 bps with the belly underperforming the wings. Yields in Germany added 1.3-4.1 bps. The intraday turnaround more or less coincided with an acceleration in the oil price rally. Inventories of the commodity keep falling rapidly in the US, IEA data showed. A report noting that stockpiles at a major US storage hub in Cushing (Oklahoma) dropped to critical levels added fuel to the fire. Brent oil yesterday surged from $94.12 to 96.55/b, the highest since November last year. Currencies including the CAD and NOK benefited. The US dollar remained very strong as well even as the yield craze didn’t filter through on equity markets as much as they did earlier this week (Wall Street finished marginally in the green). DXY advanced from 106.23 to 106.66. USD/JPY closed near its daily highest, at 149.63. EUR/USD fell off a cliff. It lost the lower bound of the downward trading channel and came extremely close in testing the 1.0484 critical support level. The pair eventually closed at 1.0503, down from 1.0572 a day earlier. Rising spreads in the European periphery, Italy in particular, increasingly grab attention and have started to weigh as well. Moves in EUR/USD, once again, saved sterling from losing EUR/GBP 0.87 support. The pair finished at 0.8655.
Yesterday’s violent market moves reverberate through Asian dealings this morning. Both the dollar and core bond yields take a breather but stocks trade mostly negative. Japan underperforms. China trades mixed while moving into a week of holidays starting tomorrow. European investors on the other hand have their hands full. Several national September inflation readings are due, from Spain over Belgium to Germany. Consensus for the latter is set at 0.3% m/m and 4.5% y/y vs 0.4% and 6.4% last month. The sharp drop reflects large favourable base effects as reduced public transport costs from June-August last year drop out of the comparison. Rising oil prices offer counterweight. The bar for markets to price in additional ECB hikes right now is high but we do think today’s outcome is to underscore the higher-for-longer narrative. That offers downside protection to yields. We stay cautious on the euro though. It doesn’t look good at all from a technical perspective. EUR/USD 1.0484/1.0516 has to survive or the 1.04 big figure is next.
News Headlines
The Italian government yesterday approved a new framework that indicates higher budget deficits for this and next year amid substantially lower-than-expected economic growth. The 2023 deficit was upwardly revised to 5.3% from a previous target of 4.5%. 2024 was raised to 4.3% from a 3.7% estimate in April. At the same time growth for this and next year was downwardly revised to respectively 0.8% (from 1.0%) and 1.2% from 1.5%. In the new scenario the Italian debt-to-GDP ratio is expected to stay near 140% through 2026. According to the government slower growth and the deterioration in the budget outlook is mainly the result of restrictive monetary policy of the ECB and the war in Ukraine. However, a higher than expected budgetary cost from tax credits/incentives for energy-saving home improvements is also responsible. Italy has to present its budget plans to the European Commission by October 15. Near 1.95%, the 10-year spread between Italy and Germany reached the highest levels since March.
The Czech National Bank (CNB) yesterday as expected left its policy rate unchanged at 7.0%, which currently is still seen as appropriate to reach the inflation target. The internal debate on future interest rate cuts has started and Governor Michl said they have a strategy in place. However, ‘at its meetings ahead, the Bank Board will base its decisions on the new forecast and an assessment of newly available data. An evaluation of the persistence of the disinflationary trend, an analysis of the labour market situation, and the evolution of domestic and external demand will be crucial […]. The Bank Board expects the interest rate path to be higher than in the baseline scenario of the current forecast in the coming quarters’, the statement reads. Inflation fell in line with the CNB’s forecast and is expected to decline further in September. Oil prices and an increase in excise duty on diesel are upside factors. CNB takes notice of the recent decline in the koruna but indicates that it stays stronger than a year ago. Board member Jan Prochazka later indicated that CNB will try to avoid surprising with its policy moves. Despite a fragile risk sentiment, the koruna yesterday strengthened from about EUR/CZK 24.48 to close near 24.35.
