Market movers today
This morning we get euro area industrial production for August. After a big drop in July of 2.3% m/m it is expected to recover somewhat in the August reading.
US PPI for September may grab some attention ahead of the important US CPI release tomorrow. Import prices have declined for the past four months, which puts downward pressure on PPI. High wage growth works in the other direction, though. Consensus is for a rise in core PPI of 0.3% m/m down from 0.4% m/m in August.
FOMC minutes tonight will give some insights to the thinking behind the Fed raising the dot plot to a peak of around 4.6% (in line with current market pricing).
In the Nordics, we get Swedish Prospera Inflation expectations.
Developments in the Russia/Ukraine war will also continue to be in focus.
The 60 second overview
The temporary QE from Bank of England continues to rattle markets. Yesterday, BoE Governor Baily urged investors to unwind any positions that are not sustainable when the temporary QE ends on Friday. However, a lobby group that represents UK pension funds has urged the BoE to continue the QE as investors need more time to unwind positions. Hence, the uncertainty/volatility remains in the UK market and with the possible spill-over effects to other markets as we have seen so far.
Yesterday, at their biannual meeting the IMF cut its growth forecast for the world economy in 2022-23 to the weakest level since 2001 (if we exclude the global financial crisis). The main drivers of the growth downgrade are the headwinds from the energy crisis and global financial tightening amid the sharp upward move in central bank rates across the world. At the same time, the IMF sees a risk that the outlook will turn worse before it turns better. The institution downgraded the economic outlook mainly for western economies, notably the euro area with Germany and Italy seeing the biggest growth downgrades. In general, despite the downward growth revisions, the IMF is still slightly more upbeat than us, especially on the US outlook in 2023.
However, the Fed’s Mester continues to argue for more tightening of US monetary policy despite the risk of a recession, and we saw a test of the 4% level for 10Y US government bond yields before the it fell back and is trading at 3.92% this morning in Asian trade.
Germany and the Netherlands are expected to put forward a proposal to bring down EU energy costs as EU energy ministers will meet in Prague today. They are also expected to keep open the proposal of capping gas prices used to generate electricity. We have more speakers from both Federal Reserve and ECB today.
Equities: Equities lower yesterday for the fifth day in a row but yesterday with the group of defensive industries doing better and ending the day higher. This also means indices were dragged lower by cyclicals and over the last five days, cyclicals have underperformed defensives by 3%. VIX continued higher yesterday, closing shy of 34. We very often see vol spiking due to one single event but the elevated VIX level right now tells a story of combined uncertainty ranging from macro to monetary policy, politics and geopolitics that investors are struggling with at the moment. In US yesterday Dow +0.1%, S&P 500 -0.7%, Nasdaq -1.1% and Russell 2000 +0.1%. Asian markets are mixed this morning. European futures are lower while US futures are showing some solid gains this morning.
FI: 10Y US Treasuries tested the 4%-level yesterday ahead of the US CPI data later this week as well as the comments from Federal Reserve’s Mester that the Federal Reserve cannot be complacent regarding inflation and need to keep tightening monetary policy. However, US government bond yields ended a bit lower.
Bank of England is going to end their temporary QE on Friday and urged investors to unwind positions before BoE ends QE. However, today the BoE added UK linkers to the QE and yields declined on both nominal and inflation-linked UK government bonds.
In the European market, there was plenty of long-end supply from Germany and EU. The 30Y German syndicated deal was weak with a modest bid-to-cover as well as a large retention from the German Debt Agency, while the bid-to-cover at the EU dual tranche, where they sold 7Y and 20Y benchmarks was solid. However, there was also a solid new issue premium in the 20Y deal.
FX: USD roughly unchanged on the day. SEK continues to weaken whereas NOK has found some support in higher short-end rates. Big swings in GBP related to policy remarks, where the near-term fate of GBP is tightly connected to BoE’s intervention plans in the Gilt market.
Credit: The negative sentiment in the credit market reversed at the last hours of trading yesterday. ITraxx Main tightened 0.5bp to 134bp and Xover tightened 5.9bp to 642bp. The primary markets continue to show life-signs with Vattenfall being able to print a multi-tranche EUR benchmark deal yesterday.
In Sweden, the October money market inflation expectations are due in the coming week. Over the past couple of months CPIF expectations (which excludes the inflationary impact from Riksbank pushing mortgage rates higher) have turned lower on all horizons. We expect to see another leg down this month.