• The established market trends basically continued yesterday. Yields maintained (EMU) or even extended (US) recent repositioning as central bankers reinforced their message that they have no choice but to continue their anti-inflationary crusade. The rise in EMU yields temporary slowed, as there was little in the way of specific news. Especially short-term European yields took a breather as a 75 bps rate hike for next week’s ECB meeting is now more or less discounted. The German 2-y and 5-y yields ‘corrected’ 1.6/2.4 bps. Longer maturities remained upwardly oriented. (30-y + 7.5 bps). US yields intraday also showed some hesitation after recent strong gains, but US data came to the rescue. US jobless claims declined for the third consecutive week (to 232k). The US manufacturing ISM also printed at a stronger than expected 52.9. Prices pressures eased (prices paid 52.5). Production held north of 50 (50.4). New orders improved (51.3 from 48.0). The employment index even jumped to a five month high at 54.2. With the Fed focused on slowing demand, the report only confirms a ‘nihil obstat’ for the Fed to further tighten monetary conditions. The US yield curve bear steepened with yields rising between 0.65 bps (2-y) and 6.8 bps (30-y). The rise in LT yields was again fully driven by real yields (10-y +9.4 bps). Inflation expectations eased further. The latter move was supported by a decline in several cyclical commodities. A further tightening of monetary conditions combined with persistent recessionary risks again hit European stocks hard (EuroStoxx -1.72%). US stock reversed (most of) their initial losses to closed mixed. (Dow +0.46%/Nasdaq -0.26%). After some hesitation earlier this week, the dollar this time profited from the rise in real yields. The DXY index touched the highest level since mid-2002. USD/JPY surpassed the 140 barrier, the weakest level for the yen since 1998. EUR/USD reversed all of this week’s ‘gain’ to close at 0.9945.
• This morning, Asian equity indices trade with modest losses, despite yesterday’s late session rebound on WS. US Treasuries are trading little changed. The dollar maintains yesterday’s gain with the DXY (109.5) holding north of the July top. USD/JPY trading north of 140 as expected triggers some verbal interventions from Japan’s Finance Minister Suzuki. Question is whether Japan has much leverage to counter a move that is mainly overall USD strength. Later today, the US payrolls (together with CPI release on Sept 13) are the last important input for the Fed to decide whether it should raise the policy rate by 75 or 50 bps at the September 21 meeting. This week’s data (consumer confidence, jobless claims, manufacturing ISM) all suggested that demand stays stronger than what the Fed is aiming for. Markets expect net payrolls growth of about 300k. The unemployment rate is expected unchanged at 3.5%. AHE are seen at a solid 0.4% M/M and 5.3% Y/Y. This week’s ADP report suggests some downside risks to consensus. However, except in case of an outsized negative surprise, expectations for bold Fed tightening probably will continue to dominate global trading.
• South Korean inflation declined for the first time since November 2020 on a monthly basis (-0.1% M/M) with the headline figure decelerating more than expected in August, from 6.3% Y/Y to 5.7% Y/Y. The monthly outcome was mainly influenced by lower oil prices. Underlying price pressure persists with core inflation only a tad lower at 4.4% Y/Y from 4.5% in July. Services inflation rose to its highest level since February 2009 at 4% Y/Y. The Bank of Korea incorporated a temporary setback in its prognosis, but expects inflation to stay at 5%-6% over the coming months. They are expected to extend their tightening cycle in regular steps of 25 bps. The policy rate currently stands at 2.5%.
• Shipment orders published by Nord Stream 1’s operator indicate a resumption of supplies tomorrow at around 20% of normal capacity. That’s equal to the levels flowing since July 27. Sources close to the German government fear a further reduction in mid-October for additional maintenance on the key gas pipe line..
The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike. More tightening is underway. Even a 75 bps hike might be on the table at the September meeting. Germany’s 10-yr yield broke out of the corrective downward trend channel since mid-June, suggesting more upside short term.
The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depends on the incoming data. QT hit max speed in September. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range, but a sustained break lower was averted. The focus is back on central bank frontloading to tackle inflation.
The euro zone’s (energy) crisis is being accompanied by an Italian political crisis, weighing down the euro. Hawkish Fed comments at Jackson Hole and the simultaneous sell-off in bonds & equities pushed the euro to new lows below parity. This year’s downward trend channel suggests more downside.
Sterling’s strong run going into the BoE meeting of August abruptly ended. The central bank hiked by 50 bps. More hikes are likely given stellar inflation, but have been priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move. EUR/GBP finally broke out of the corrective downward trend channel since mid-June.
This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.
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