• Markets whipsawed yesterday, lacking guidance from mixed economic data in Germany (ZEW) and the US (industrial production strong but tumbling NAHB housing market confidence). Stocks finished in the green (about +1%) but were well below intraday highs. Energy prices extended their recent decline. Brent oil closed just above $90/b and Dutch gas futures (€113/MWh) fell to the lowest level since June as high inventory levels ease concerns for a winter shortfall. Core bonds traded choppy in the neighborhood of recent cycle highs. US yields edged no more than 1.4 bps lower. The 10y yield held above 4% for a third day straight. Minneapolis Fed Kashkari in an after-market speech said he sees no reason why the Fed should stop at 4.5 or 4.75% in early 2023 if core inflation by then showed no material progress. German rates added between 1 to 2.8 bps across the curve with the belly outperforming the wings. European swap yields, in contrast, fell 3.4-4.8 bps in the 2y-10y segment. Gilt yields fell a few bps too with the very long end (30y, -7 bps) outperforming. The Bank of England dismissed an FT article reporting a further delay (beyond October) in the start of UK gilt sales. However, for Q4, the central bank will refrain from selling bonds with a maturity longer than 20 years. Any shortfall in the £80bn sales target as a result of the earlier postponement will be incorporated into sales in subsequent quarters. The US dollar’s performance improved from soft to mixed during US dealings. EUR/USD capped gains to 0.986 and the trade-weighted index (close above 112) avoided an actual test of the lower bound of the upward sloping channel. USD/JPY defied all verbal warnings and grinded higher towards 150. Sterling fell. EUR/GBP finished north of 0.87.
• Kashkari’s after-market comments yesterday help US yields a tad higher this morning. The 10y (+2.1 bps) inches further north of 4%. Germany’s Bund future drifts south. Oil prices rise marginally even as the US said it is prepared for significant releases from its strategic reserves this winter if needed (see below). Sentiment is mixed. Chinese stocks underperform regional peers in quiet trading. The Federal Reserve kicks off its monetary cycle with the publication of the Beige Book later today. We doubt it’ll have any impact on financial markets though. The waiting game is in full play this week and that probably won’t change. Core bonds and (EUR/)USD are stuck in a sideways trading range for the time being with daily swings defined by general sentiment/earnings season. Economic data today included a higher-than-expected UK September CPI print. Prices rose 10.1% y/y, up from 9.9%. Core inflation accelerated from 6.3% to 6.5% (6.4% expected). The pound sterling in a first reaction loses marginal ground.
• Later today, US president Biden is expected to announce to release of a last tranche of 15 mln barrels of oil from the US strategic reserves from a total of $ 180 mln that was announced in March as the US government tries to ease higher oil prices for US consumers going into the mid-term elections. At the same time, according to sources, the US president may indicate that he is prepared to do more during the winter if this would be necessary. The White House also said it intends to restore the reserves, buying oil when the price of WTI is at or below the $67 to $72 p/b range. Both WTI and Brent oil this morning are trading up from yesterday’s intraday low with Brent oil hovering near $90.5 p/b.
• Czech lawmakers yesterday approved that this year’s budget deficit will be allowed to rise to CZK 375 bln, about a third higher compared to the initially planned deficit of CZK 280 bln. The rise in the deficit comes as the government took measures to shield consumers and firms higher energy prices due to the war in Ukraine. The rise in the budget deficit marks a U-turn in the government’s policy which initially prioritized on cutting the fiscal deficit. For 2023, the government aims to reduce the deficit to CZK 290 bln. The reaction of the krone to the budget announcement was close to non-existent. EUR/CZK is holding a tight range near 24.55.
The ECB ended net asset purchases and lifted rates by a combined 125 bps at the July and September meetings. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. The correction end of September found support at the June high. Germany’s 10-yr yield is retesting the highest levels since 2011 (2.35%) with real rates driving the push higher. Short-term, we expect this resistance level to hold.
The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 4.5% early next year and remain above a neutral 2.5% over the policy horizon. QT hits max speed. The 10y reached its highest level since 2008 (4.01%). This is acting as a resistance for the time being.
EUR/USD is in a strong downward trend channel since February. The dollar remains the main beneficiary of rising US (real) yields in a persistent risk-off context. Geopolitical and recessionary risks are bigger for Europe, holding down the single currency as well even as the ECB finally embraced on a tightening cycle. Resistance stands at EUR/USD 0.9950/1.0050. The YTD low stands at 0.9536.
The new UK Chancellor tossed the mini budget to the bin. It triggered a relief rally in gilts and to a lesser extent in sterling. Lingering political uncertainty (Truss’ position), yawning twin deficits (despite the fiscal U-turn) and the now greater risk of a biting recession undermines the pound’s attractiveness nonetheless. EUR/GBP 0.86 should survive as a support.
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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