Tuesday, September 13, 2022

Daily Market Overview

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• US headline inflation in August rose 0.1% m/m, defying (commodity driven) expectations for a 0.1% decline. Year-on-year, prices grew by 8.3%. While down from 8.5% in July, the cooldown was less than the 8.1% hoped for. Core measures even surged 0.6% m/m. That’s double the pace analysts’ foresaw and that of July. Compared to August last year, core inflation quickened to 6.3% (vs 6.1% consensus). Energy indeed weighed considerably on prices last month, tanking 5% m/m. But many other categories clearly provided a significant counterweight. These include the notoriously sticky shelter component (0.7% m/m), new vehicles (0.8%) and transportation services (0.5%). Investors were (too) confident in thinking that inflation would cool down quickly and that it could remove some of the enormous pressure on the Fed. In the summer, we’ve seen a similar thinking play out. Back then recession fears drove the correction in yields. In both cases, however, reality forces markets to reassess. Today’s report caused a mini crash on bond markets. US yields swap losses of more than 6 bps for stunning gains in a matter of seconds. The curve flattens with changes going from +2.7 bps (30y) to 15.3 bps (2y). The 2y yield forces a decisive push through recent resistance levels just north of 3.5% to set a new 15-year high (3.74%). This opens technical opportunities for a return to the psychological 4%. A 75 bps move at the Fed meeting next week with this data is a done deal. US money markets indeed discount a more than 100% chance. They even attach a 65% probability for a similar move in November. European yields get caught in the slipstream, with swap yields adding 6.4-10.4 bps in a flattener. Here too, the 2y tenor steams ahead to new cycle highs (2.37%). Next stop: 2.5% (2011 high). The sharp rise in real yields – the 10y one in the US hits 1% for the first time since 2018 – hurts equities and other risky assets. The EuroStoxx50 tumbles 1.4% in the red, reversing gains of 1%. American indices gap lower at the open. The Nasdaq suffers the biggest losses (-2.7%). Brent oil slips sub $95/b after the inflation release, snapping a three-day winning streak.

• Dollar strength is back after a two-day sabbatical. The greenback roars back against all G10 peers with the trade-weighted index rebounding from 108 support to 109.14 currently. 109.29 marks the previous cycle high (July) and serves as immediate resistance and is probably soon up for a test. EUR/USD’s comeback over the previous days ends in tears. A second attempt to escape the 2022 downward trend channel reversed instantly. The pair fell from just south of 1.02 to close to parity again. USD/JPY (144.6) is on track to close at a new 44-year high.

News Headlines

• The UK unemployment rate in the three months to July dropped from 3.8% to 3.6%, the lowest level since 1974. While good news at first sight, the underlying dynamics suggests a more mixed picture. The decline in the unemployment rate was for an important part due to people leaving the labour market, raising the inactivity rate by 0.4% to 21.7%. At the same time, employment growth in the 3mths to July slowed the 40k from 160k, a figure substantially weaker than expected. The total actual weekly hours worked in the 3 months to August also declined and stays below the pre-corona level. Weekly earnings growth (ex-bonuses) accelerated faster than expected from 4.7% 3M Y/Y to 5.2%. However, this is still well below the headline inflation which printed at 10.1% in July. August UK inflation will be published tomorrow morning. Vacancy data also suggest a tentative loss of momentum in the UK labour market. Available jobs in the June-August period declined 34 000, albeit to a still high 1.266 mln.

• According to reports from German daily Handelsblatt and sources at the Ministry of Finance, the German government intends to use a mechanism set up to support companies at the time of the corona crisis to support struggling energy firms. State Development Bank KFW is said to be able to use €67 bln of the WSF Stabilization Fund to provide liquidity assistance and guarantees to struggling energy companies as they have to cope with higher prices and growing liquidity needs to meet a sharp rise collateral claims. The German cabinet is expected to approve the measures on Wednesday.

Graphs & Table

US2 yield steams through to new 15-year highs after CPI, depending on the gauge, eases/increases less/more than hoped/feared.

Dollar strength is back: trade-weighted index rebounds of 108 barrier as inflation supercharges Fed hiking bets.

S&P500 tanks at the open as …

… real core bond yields extend their ascent. The 10y variant hits 1% for the first time since 2018.

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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