Sunset

Wednesday, October 19, 2022

Daily Market Overview

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Markets

• As was the case yesterday and on Monday, eco data still were second tier today. EMU September inflation was revised out of double digit territory (9.9% Y/Y from 10.0% preliminary reading), but with metrics of core inflation trending decisively higher, this doesn’t change the conclusion that the ECB still has plenty of work to do. US housing starts surprised to the downside confirming other evidence that rising yields are weighing on activity in the sector. Admittedly, permits were marginally better than expected. Even so, after a tentative pause earlier this week, core bond yields resumed their ‘natural drift north’. Fed’s Kashkari yesterday warned that, if core inflation continues to rise, it’s no option for the Fed to stop its tightening cycle at 4.50% or 4.75%. This leaves room for markets to reprice the peak Fed policy rate beyond the 4.875% forecast of the MPC hawks at last month’s Fed’s dot plot. US yields are gaining between 10 bps (2-y) and 5 bps (30-y) with bond yields across the whole curve touching new cycle peak levels intraday. The German yield curve also bear flattened. Bunds hugely underperform EMU swaps. German yields are gaining between 10 bps (2-y). The 30-y trades marginally lower (-1 bp). The 2-y bund yield also touched a new cycle top at 2.12%. ECB’s Nagel yesterday evening reiterating that the ECB should soon start reducing its bond portfolio maybe partially explains the bund underperformance versus swaps. Will the ECB already give some hints on this topic at next week’s policy meeting? Whatever, QT is on the radar of European bond markets, too. For now, the impact on intra-EMU spreads remains manageable. The 10-y Italian spread vs Germany even eases slightly (- 2bps). The resumption of the yield uptrend also caps this weeks tentative ‘rebound’ of equities. The EuroStoxx 50 (+ 0.3%) returned most of an intra-day uptick. US indices open mixed to modestly lower (S&P -0.2%).

• Higher real yields and the risk-rebound running into resistance again changed fortunes in favour of the dollar. DXY jumped from the 112 area in Asia this morning to currently trade at 112.8. EUR/USD dropped back below the 0.98 handle (0.978). USD/JPY (149.75) is nearing the 150 psychological barrier with markets still pondering Japanese authorities’ strategy on the protracted decline of their currency (hidden interventions?). Sterling reversed a poor start (against the euro) after September UK CPI again printed in double digit territory (10.1). Still, EUR/GBP finally drooped back below the 0.87 handle in calm trading.
 
News Headlines

• Canadian inflation rose by 0.1% M/M in September with the headline number marginally slowing down from 7% Y/Y to 6.9% Y/Y. Consensus expected a bigger fall (-0.1% M/M & 6.7% Y/Y). Lower gasoline prices were mostly responsible for the deceleration (-7.4% M/M). Prices for food purchased from stores (+11.4%) grew at the fastest pace Y/Y since August 1981 (+11.9%). Unfavorable weather, higher prices for important inputs such as fertilizer and natural gas, as well as geopolitical instability stemming from Russia's invasion of Ukraine contributed to the rise in food and beverage prices. Excluding food and energy, prices rose 5.4% in September (from 5.3% Y/Y). The cost of services accelerated from 5.5% Y/Y to 5.6% Y/Y. Mortgage interest costs also continued to put upward pressure on overall inflation. Average hourly wages rose 5.2% Y/Y. The upward inflation surprise suggests that the BoC will need to stick to the September 75 bps rate hike pace instead of slowing down to 50 bps. The policy rate currently stands at 3.25%. Canadian swap yields rise by 8.5 bps to 13.5 bps today with the belly of the curve underperforming the wings. The loonie fails to profit with USD/CAD a tad higher near 1.3770.

• Polish consumer confidence dropped to its lowest level on record in October (-45.5 from -44.2) with underlying details showing a deterioration in both the current situation and future expectations. Polish citizen’s became much more concerned on job security, the general economic situation in the country and the potential to save money.

Graphs & Table

USD/INR: Indian rupee jumps to new all-time against the dollar despite recent RBI interventions.

German 2-y yield hits new cycle top as Bunds underperform swaps.

USD/CAD: loonie doesn’t escape broader USD rebound even as inflation suggests more decisive BOC action.

EUR/USD holding recent consolidation pattern between 0.9536 and 1.00.

Note: All times and dates are CET. More reports are available at KBCEconomics.be 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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