Germany Said to Support EU Loans, But Not Grants

Market movers today

IMF will publish new forecasts today and will almost certainly revise lower global growth. But it will be interesting to see by how much. Their call on inflation developments will also be in focus.

The US NFIB small business optimism index is also due out. The release has some interesting sub-indices on price plans and compensation plans that adds some information to the state of inflation and labour market pressures.

In the Nordics, the Danish Economic Council publishes its’ fall report.

Developments in the Russia/Ukraine war will also be followed closely following the recent reescalation. Yesterday Putin held a meeting in the Security Council, which could result in new military actions.

Today brings a bunch of labour market data from the UK and we expect the unemployment rate to be unchanged at 3.6% at the same time as wages are expected to take another step up. We acknowledge the inflationary nature of the fiscal package and thus see a large upside risk to our current call on BoE but think market pricing is too aggressive (currently 370bp until June 2023). However, today’s figures will probably not ease the pricing. More important data about the economy will be released tomorrow with both production data and August GDP, which will give more information about the Q3 development.

The 60 second overview

Yesterday, Bloomberg reported that German chancellor Scholz backed joint EU debt to address the energy crisis, if given in the form of loans and not grants. Similar structure was announced during the early Covid-response phase via the SURE programme. That said, Reuters later rejected such proposal. However, the proposal comes as the fiscal support from Euro area governments is intensifying. By 15 October all EU member states have to hand in the 2023 budgets to the EC, although the SGP is suspended for 2023, so markets may discipline the member states rather than the EC themselves.

Japan’s PM Kishida said in an interview that companies that pass on higher prices should also give higher wages. And the government is preparing measures to support businesses in the process. Kishida fully backs the very loose monetary policy and yield target from the BoJ.

Equities: A new week for equities but challenges remain the same and so did the reaction in markets yesterday. Indices in Asia, Europe and US all lower and with bond yields setting the direction. The post BoE emergency intervention rally in equities are now gone and several indices testing new lows. VIX rose to north of 32 yesterday all sectors lower led by long duration cyclical sectors. In US Dow -0.3%, S&P 500 -0.8%, Nasdaq -1.0% and Russell 2000 -0.60%. Sell-off in Asia intensifies this morning with tech stocks under pressure leading to big losses in Taiwan and South Korea. Weakening Asia not so much related to higher yields but rather attributed to the US export control announcement that aims to further restrict China’s access to US-made semiconductor technologies. European and US futures lower as well this morning.

FI: What on paper seemed to be an uneventful session with US out for Columbus Day turned out quite volatile. Initially rates were under pressure from the UK as BoE confirmed its intention to end its temporary bond buying on Friday, but also the long end supply from EU and Germany contributed to the rates higher move. In the afternoon, Bloomberg reported that Scholz backed joint EU debt to address the energy crisis in the form of loans and not grants, which sent German yields 10bp higher on the news, ending the day 15bp higher at 2.34%. At the same time, BTPs staged a massive rally, ending the day 22bp tighter vs. Bunds. Late yesterday, Reuters published a piece with sources rejecting Scholz’ view. That said, markets remain sensitive to the significant fiscal stimuli that may be coming to the market. Curves bull steepened across the board.

FX: Broad USD continues to strengthen and are closing in on September highs. Big swings in Scandies, but whereas the SEK weakened further yesterday the NOK, alike oil currencies in general, performed well, further aided by the inflation beat at home. USD/JPY are once again trading close to levels which prompted BOJ to intervene in September. The Yuan slid as well, as investors fear that Beijing will continue to uphold their Zero-Covid policy.

Credit: Yesterday, the week started on a weak footing with iTraxx main widening by 3bp to 135bp. The Xover index widened 11bp to 637bp. The leg wider was driven by a cocktail of renewed Russian aggressions and fears of further Central bank hawkishness.

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