Thursday, September 15, 2022

Daily Market Overview

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• ECB members over the past 24 hours did little or nothing to counter the post US CPI inflation bond sell-off. On the contrary, they seem to embrace it and added fuel to the fire. ECB Kazaks (Latvia) thinks that the ECB will continue raising rates beyond February 2023. That’s at least another 4 rate hikes coming. Kazaks makes Lagarde’s maximum (more than 2, less than 5) a minimum. ECB Holzmann (Austria) talked a lot about could have been’s and should have been’s when it comes the start of the tightening cycle. After reminiscing, he concluded that inflation is set to accelerate even more with stagflation the potential outcome for Europe. Strong inflation is the reason why the ECB reacted, and reacted strongly and will continue to react in the future. ECB Makhlouf (Ireland) stressed that raising rates is absolutely necessary as EMU inflation is undesirably high. Vice ECB-president de Guindos mentioned the weak single currency as additional source of inflation. Determined action in needed to anchor price expectations even as growth will slow substantially. ECB Centeno (Portugal) was today’s exception to the rule, advocating predictable, small, steps, in the tightening cycle. Markets clearly turned a deaf ear to Centeno’s (minority) view. The core bond sell-off continued. German yields added up to 7.3 bps (2-yr) in a bear flattening move. EMU money markets for the first time discount a 2.75% ECB policy rate peak mid next year. We stick with our view that this is too conservative. The EU 2y-5y swap part of the curve inverts today for the first time since 2008. The front end of the US yield curve underperforms as well with yields rising by 2.7 bps (30-yr) to 6.6 bps (2-yr). The bond sell-off spills over to stock markets again with European indices losing up to 1% and main US gauges opening around 0.5% weaker. The dollar holds strong on FX markets, trading near this week’s highs. EUR/USD is changing hands around 0.9985. Sterling weakened in the wake of the publication of the Bank of England’s quarterly inflation survey (see below). EUR/GBP touched the 0.87 big figure. Key resistance stands at 0.8721. We stick with the view that it’s only a matter of time when this ceiling gets pierced.
News Headlines
• The Bank of England published the results of its quarterly survey of public attitudes to inflation. The survey was conducted between 5 and 8 August. The median answer from respondents asked on current inflation rose from 6.1% at the May survey to 7.6% in August. Actual UK August headline inflation as published yesterday printed at 9.9% (from 10.1% in July). Respondents see inflation for the coming year at 4.9% (from 4.6%). However, expectations for the twelve months thereafter eased back to 3.2% from 3.4% in the May survey. 75% of respondents (was 70% in May) expect rates to rise over the next 12 months. Asked to make an assessment on the way the BOE is ‘doing its job to set to interest rates to control inflation’ the net satisfaction balance dropped to -7.0% from -3.0% in May. The -7% reading was the lowest on record.
• Swedish outgoing Prime Minister Andersson resigned the centre-left coalition which was defeated in elections by a group of right wing parties this weekend. The head of the Moderate’s party, Ulf Kristersson, is now expected to start negotiations to form a new government involving its Moderate party, Christian Democrats, the Liberals and the Swedish Democrats even as the latter far right party overcame the Moderates as the second biggest party. It is possible that Kristersson will try to form a minority government that will have to rely on the support of one or two of the other right-wing parties in Parliament. Sweden will take the rotating leadership from the EU form January next year.

Graphs & Table

EMU 2y5y swap spread (black) inverts for the first time since 2008. EMU 2y10y swap spread at 2 bps

S&P 500: tough start as core bonds remain in sell-off mode

USD/CNY breaches psychological 7 barrier for the first time since 2020

AUD/USD: Aussie dollar can’t profit from this morning’s good labour market data for August

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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