• US payrolls added a robust 315k but a downward two-month revision, slowing income growth and an unusually large uptick in the participation rate drew the attention. It smoothed off some of the sharpest edges in terms of Fed expectations, boosting risky assets. European stocks inched 2.5% higher but after the close news came that Russia’s Gazprom will keep the gas taps closed after the three-day maintenance period that normally ended on Saturday, citing a “leak”. There were some reports from the Kremlin earlier on the day that suggested this would happen but these were ignored. US indices reversed gains of as much 1.3% into similar-sized losses (Nasdaq) in response. Both risk sentiment as (US) eco data worked in favor of core bonds. The US yield curve bull flattened with changes between -11.2 bps (2y) and -1.6 bps (30y) going into the long weekend with markets closed today for Labor Day. European swap yields fell 2.9 bps (30y) to 7 bps (3y, 5y) but note that these changes date from before the official Gazprom announcement. EUR/USD’s gains (dollar weakness) evaporated quickly. The pair eventually closed more or less unchanged just below parity. It helped the trade-weighted DXY to pare losses to 109.54, down from 109.69. The Japanese yen didn’t profit despite the drop in core bond yields. USD/JPY held above the 140 barrier. EUR/GBP tested resistance in the high 0.86 zone but headed into the weekend at 0.865, awaiting the outcome of the final voting round in the UK leadership race. The result will be announced around noon.
• The gas story dominates Asian markets this morning and will most definitely spill over to European dealings. Stock losses remain fairly limited for cash markets in the Asian-Pacific region but futures in Europe point at an ugly -3% opening. Gas prices are poised to surge when markets open. Germany meanwhile announced a €65bn aid package of relief measures, partially funded by a windfall tax on electricity producers. There’s an EU emergency summit on the energy crisis this Friday with a range of measures to be proposed. Oil prices jump more than 2% as investors mull chances for production cuts by OPEC later today. Aside from energy, the ECB will be in focus this week too. Everything is in store, especially with the latest escalation in the energy market, for a 75 bps rate hike on Thursday. But whether (expectations for) a hawkish ECB will suffice for core/European bond yields in the current risk-off environment is doubtful. We expect to see some classic haven flows for the time being. The euro is and will likely remain under pressure, providing another argument for forceful ECB action. EUR/USD sinks below the previous YtD lows sub 0.99 to the weakest level in two decades. The break further deteriorates the technical picture. There’s little in the way for a return to 0.96 in first instance.
• The governments of Finland and Sweden announced measures to support (financial) stability in the energy sector as prices in power markets are skyrocketing. Higher prices have sharply raised the amount that energy providers have to put as collateral with exchanges. Both countries set up liquidity facilities including both loans and credit guarantees. Sweden provided loan guaranties worth SEK 250 bln kronor. Finland approved loans and guaranties worth € 10 bln. According to Swedish Finance Minister Damberg the measures were needed to prevent that contagion from turbulences in the energy market to spill over to the rest of the financial markets.
• The recovery in the services eased slightly in August according to the Caixin Services PMI. The index eased to 55.0 from 55.5 in July, which was still the highest level in 15 months. The August reading marked the third consecutive month of expansion. Even so, service providing companies continue to face rising input costs and the employment index stayed below the 50-level. The Caixin China composite PMI also eased from 54.0 to 53.0. The Chinese yuan this morning remains under pressure which USD/CNY reaching 6.9375, the weakest level in 2-years for the Chinese currency against the US dollar. A global risk-off context and uncertainty on new regional lockdowns weighing on the economy continue to keep the Chinese currency in the defensive.
The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike. More tightening is underway. Even a 75 bps hike is on the table at the September meeting. Germany’s 10-yr yield broke out of the corrective downward trend channel mid-August. Return action higher since then met some resistance recently and could introduce a period of consolidation.
The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depends on the incoming data. QT hit max speed in September. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range, but a sustained break lower was averted. The focus is back on central bank frontloading to tackle inflation.
The euro zone’s (energy) crisis is being accompanied by an Italian political crisis, weighing down the euro. Hawkish Fed comments at Jackson Hole and the simultaneous sell-off in bonds & equities pushed the euro to new lows below parity. This year’s downward trend channel as well as the break below previous YtD lows (< 0.99)=”” suggest=”” more=””>
Sterling’s strong run going into the BoE meeting of August abruptly ended. The central bank hiked by 50 bps. More hikes are likely given stellar inflation, but have been priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move. EUR/GBP finally broke out of the corrective downward trend channel since mid-June.
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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