Markets
Returning after a long weekend due to the Labour Day holiday, US investors see the glass half empty rather than half full looking forward to key US eco data to be published today (ISM manufacturing ISM) and later this week (Jolts openings tomorrow, ADP, jobless claims and services ISM on Thursday and payrolls on Friday). After a positive close yesterday, the EuroStoxx 50 eases 0.50%. The S&P 500 also ceded 0.7% at the open. Major US indices are nearing resistance of all-time top levels. If markets are currently priced for a ‘perfect’ soft landing; maybe both much better than expected data (and higher yields) as well as really negative surprises (recession fears, cfr early last month) might trigger volatility. A further decline in the oil prices also suggests lingering uncertainty on global (including Chinese) demand. Brent oil is touching a new YTD low near $ 74.6 p/b. After trading little changed this morning in Europa, the risk-off repositioning pushed EMU and US yields of a cliff this afternoon. US yields are falling between 3.5 bps (2-y) and -6.2 bps (30-y). Similar story for Bund yields (2-y -5 bps , 30-y -8.4 bps). Even so, we think the downside in ST EMU yields is still rather well protected. Last week’s sticky underlying inflation metrices and financial newswires reporting an on internal debate within the ECB on the neutral policy rate level for this easing cycle, currently makes investors cautious to fully discount additional 25 bps steps at the three remain meeting this year. In FX, the dollar doesn’t profit from the risk-off. DXY trades gains little changed. The euro also still looks vulnerable among the majors (EUR/USD 1.1055). The yen outperforms. The risk-off, a decline in core yields and the BOJ governor Ueda reconfirming the BOJs intention to raise interest rate further if the economy develops as expected, all further supported the yen (USD/JPY 145.55 from 146.9, EUR/JPY 161 from 162.65). Smaller, especially commodity related currencies (CAD, AUD, NZD, NOK) are fighting an uphill battle.
At the time of finishing this report, the US manufacturing ISM is holding most of last month’s decline (47.2 from 46.8). Details are mixed with orders declining further (44.6 from 47.4), but prices paid (54.0 from 52.9) rising. The decline in employment slows (46 from 43.4). In a first reaction, the risk-off repositioning continues.
An important reality check the UK Gilts market as DMO launched a new 2040 bond. Despite recent negative headlines on the state of UK public finances, the sale attracted a big orderbook of over £110 bln for a deal size of £8 bln. UK(LT) gilts today are trading more or less in line with their German counterparts. Sterling initially captured a better bid, but the unfolding risk-off sentiment prevent a new test of the 0.84 support area (currently 0.842).
News & Views
Swiss CPI remained unchanged in August compared to July. Inflation was 1.1% higher compared with August of last year (from 1.3% in July). Both were slightly lower than expected. Details showed higher prices for housing rentals and for clothing and footwear offsetting lower prices for transport, heating oil and international package holidays. Goods and services inflation were both flat on a monthly basis as well with goods prices 0.7% lower Y/Y and services prices 2.2% higher. Core inflation rose by 0.1% M/M to stabilize in Y/Y-terms at 1.1%. An upward revision to Swiss Q2 GDP data showed the economy growing by 0.7% Q/Q instead of 0.5% Q/Q (1.8% Y/Y from 1.5% Y/Y). Adjusted for sporting events, the first indication (0.5% Q/Q) was confirmed. Strong expansions in the chemical and pharmaceutical industry on the back of dynamic exports stood out. An expenditure breakdown pointed at below average private (+0.3%) and government (+0.2%) consumption and mixed investments. Net exports were again the key driver. The Swiss franc is slightly stronger after the data (EUR/CHF 0.94). The benign inflation outlook and stalling domestic demand cement the case for another September rate cut (discounted). Little maneuvering room from the SNB suggests by default CHF-strength as global monetary condition turn less restrictive.
French caretaker finance minister Le Maire warned that the budget deficit could rise from 5.5% of GDP to 5.6% this year instead of the forecasted decline (in April) to 5.1%. Le Monde reports that he recommends immediate savings totaling €16bn. The extra slippage comes from lower than expected tax revenues and from higher spending by local authorities. Time is running short as the 2025 budget bill needs to be finalized by mid-September and debated by Parliament from October 1. Especially since French President Macron still needs to name the next prime minister and future government in the wake of highly divided election results in early July snap legislative elections.
Graphs
USD/JPY: risk-off, lower core yields and BOJ reconfirming policy normalization all favour the yen.
UK 15-y yield: 2040 gilt auction attracting ample investor buying interest, despite fiscal challenges.
EUR/CHF: Swiss franc holding strong evens as soft inflation paves the way for September SNB rate cut.
Brent oil tumbling to YTD low as markets grown ever more uncertain on China/global demand.
