Markets

•          Traders around the world, including in the US after Labour Day, have swapped their loungers for office chairs and governments were made well aware. Risk premia are back with a vengeance after a relatively calm summer period. The ultralong end of the curve is underperforming and the UK is once again lagging peers. The story is plain and simple: highly indebted countries keep on making deficits in a fundamentally different interest rate environment without massive central bank buying and with markets instead demanding higher compensation for increasing (credit) risks. The UK case stands out ever since the Truss-Kwarteng mini budget debacle in 2022. And going into this October’s budget, finance minister Reeves faces a trilemma of upholding the self-imposed fiscal straightjacket, keeping her spending commitments (or said otherwise: no meaningful spending cuts) while holding to her promise not to raise taxes again. Something’s got to give and the gilt market fears it’s going to be the first one. The 30-year UK yield adds 6 bps, launching the closely watched tenor towards the highest level since 1998. Other maturities add between 1.6-5.1 bps. The fiscal tidal wave is coming for everyone and since the spending U-turn announced by Merz early March, that includes German Bunds. Its 30-year tenor rose to 3.4%, the highest level in 14 years. The 30-year European (swap) equivalent is on the verge of topping 3% for the first time since November 2023. The US is no different (even though no one is talking about the BBB anymore), resulting in daily yield changes of 4.4-5.4 bps. Watch for the 30-year (4.97%) over there to hit 5% near-term. Similar-dated Japanese bond yields have added 2.7 bps but are bound to rise further in tomorrow’s Asian session after missing out on part of the intraday rise in the other regions. The core bond selloff triggers broader risk aversion, notably in equity markets. European stocks shed 1.4%. Main indices on Wall Street drop up to 1.5% (Nasdaq) at the open. The US dollar emerges as the main beneficiary on currency markets. Losing a safe have appeal doesn’t happen overnight, of course, but is a slow process of gradual erosion. The greenback gains against all of the important peers, most notably against sterling. GBP/USD suffers a double whammy with the pair dropping from 1.354 at the open to 1.337 currently. EUR/USD eases to 1.164 but in a move far from technically significant. The pair has room for further declines towards the 1.14(3) area before things get tricky. The trade-weighted dollar index rebounds to 98.4, up from 97.6 at the open. Fiscal worries also weigh on the yen (USD/JPY 148.5), preventing it from fulfilling its safe haven status. Gold, on the other hand, does. The precious metal looked through the yield increase to briefly hit a new all-time high. The US manufacturing ISM is still up for release after this report but it’s unlikely it’ll alter the current market moves.

•          Hungarian Q2 GDP growth was confirmed at 0.4% Q/Q and 0.1% Y/Y today. From a production point of view, valued added in construction was 4.3% higher Y/Y and activity in services rose 1.3% Y/Y. Industrial activity (-3.3% Y/Y) and agriculture (-11.4% Y/Y) contributed negatively to growth. Considering an expenditure point of view, household consumption rose 1.8% Q/Q (was 0.1% in Q1) and 4.5% Y/Y. Government consumption rose 1.2% Q/Q and 9.8% Y/Y. On the other hand, gross fixed capital formation declined 1.9% Q/Q and -7.0% Y/Y. Exports declined 0.9% Y/Y as imports rose 4.0% Y/Y, resulting in a negative contribution of 3.4 ppts to yearly growth. Hungarian swap yields today add about 3-5 bps across the curve. This is probably driven by the overall market focus on fiscal sustainability, and higher risk premia rather than on data published today. The forint declines, albeit mildly, given the overall risk-off context (EUR/HUF 395.75).

•          According to Bloomberg referring to remarks from Michl after his trip to the Jackson Hole meeting, the CNB governor supported the recent process to reduce interest rates, but indicated that monetary policy should avoid holding borrowing cost extremely low for a long period. Michl was said to support the view that without fiscal reforms and in a context with an aging population and rising government debts, central banks will have to hold rates higher than in the period before the pandemic. Michl distanced himself from previous policy of currency interventions, including a bigger CNB balance sheet and negative real interest rates, and indicated this will have to be offset by relatively higher interest rates than before.

Graphs

Rising risk premia hurl UK’s 30-yr yield to the highest level since 1998

GBP/USD: cable suffers from a nasty combination of GBP weakness and USD strength

Gold ($/ounce): risk aversion > higher (core) bond yields

Nasdaq drops 1.5% at the open. Core bond selloff sparks broad risk aversion

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