Monday, October 3, 2022

Daily Market Overview

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• Core bonds kick off the final quarter of the year recovering from the massacre they had to endure over the course of August and September. It was the Bank of England that ushered in this period of consolidation by announcing an emergency bond buying programme for the sake of financial stability mid-last week. UK Gilts outperform today, thanks to Chancellor Kwarteng’s pivot. In an interview this morning, the finance minister said he would not proceed with the abolition of the top tax rate. The measure is estimated to cost some £3bn, peanuts compared to the remaining £40bn+ unfunded tax cuts on top of the cost related to energy caps. It does fuel (market) hopes for the government to backtrack on other, more costly desiderata. The UK curve steepens with declines ranging between 16.6 bps (30y) to 25.6 bps (2y). Money markets price out 50 bps of rate hikes. The terminal rate is now seen at 5.5%. US Treasuries perform better than Bunds but it’s a close call. US yields drop about 15 bps in the 2y-5y segment and 9-13bps in the 10-30y going into the manufacturing ISM release later today. Real yields bear the brunt. Yields in Germany ease 11-13.3 bps across the curve with the 10y yield (1.98%) nearing first support at 1.927% (June high). Europe’s 10y swap yield (-12.7 bps) loses the symbolic 3% mark. Oil prices advance more than 4% today (Brent at $88.64/b). This follows rumours that OPEC+ would cut oil production by as much as 1 million barrels per day, the biggest curb since the pandemic. The cartel seeks to put an end to sliding oil prices over lingering recession fears. Since the summer, Brent lost about a third of its value. Commodity currencies outperform as a result. The likes of the Canadian, Aussie and New Zealand dollar add between 1 and 1.5% against the US dollar. But it’s nothing more than only partially undoing Friday’s leg lower (which actually stretches back all the way to mid-September). Sterling enjoys some bids after the Kwarteng-pivot. EUR/GBP eases below first support at 0.8721 to test the big figure. Cable (GBP/USD, 1.124) is on track to recoup all of the losses incurred since the Chancellor announced the mini-budget on September 23. The pair is aided by a softer dollar in general. EUR/USD nevertheless weakens a tad further south of 0.98. Gas prices tank almost 10% as stocks near 90% while demand this year could drop as much as 10%, the IEA said in its quarterly report this morning. But that’s of little help for the euro this time. European stocks erased 2.4% losses to turn flat. US equities add between 0.3-1%.

News Headlines

• The Turkish statistical office today reported September inflation at 3.08% m/m and 83.45% Y/Y (was 1.46% m/m and 80.21% Y/Y). Core inflation also rose further to 68.09% from 66.08%. Both figures were close to expectations. In a monthly perspective, the biggest monthly again came from housing (9.99% M/M) followed by education (6.99%) and communication (3.4%). In a yearly perspective, transportation (117.66%), food and non-alcoholic beverages (93.05%) furnishings and household equipment (89,68) showed the biggest rise. PPI inflation also accelerated further to 4.78% M/M  and 151.50% Y/Y. The further rise in inflation comes as the Central Bank of the Turkish Republic further eased the policy rate to 12% in September as the government aims for lower rates to support growth and exports. In line with recent price action, the reaction of the Turkish lira was limited (EUR/TRY 18.17).
• Inflation in Switzerland unexpectedly slowed in September. Headline inflation printed at -0.2% M/M and 3.3% Y/Y (down from 3.5% in August). Core inflation was unchanged at 2.0%. The move, amongst others was driven by a 2.6% monthly decline in petroleum products. Services prices also declined 0.2% M/M. Still, the figures remains above the 2% target and the SNB is expected to raise its policy rate further in December. Other data showed that sight deposits held at the SNB dropped sharply in the week to September 30 from CHF 626.6 bln to 563.7 bln. The decline suggests that the SNB used bond sales, reverse repos or bill sales to drain liquidity from the market and bring the market interest rate closer to the SNB policy rate (0.5%). After declining at the end of last week, the Swiss franc today stabilized near EUR/CHF 0.9665.

Graphs & Table

UK 2y yield drops more than 20 bps after Chancellor drops plans to scrap top tax rate.

USD/CAD: Canadian loonie recovers some ground as OPEC+ mulls biggest output cut since the pandemic.

S&P 500 licks it wounds after falling to a new YtD low on Friday.

EUR/HUF: strike two for the MNB. Don’t. Call. The. End.

Note: All times and dates are CET. More reports are available at which you may sign up to.

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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