Thursday, October 13, 2022

Daily Market Overview

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• With no important data in the EMU, global markets held a wait-and-see approach going into the key US September inflation release. Once again UK markets were the exception to the rule. The BoE yesterday buying the biggest amount of long term and inflation linked bonds (combined £ 4.6 bln) eased market stress. The move was supported by (unconfirmed) rumours that the government was discussing how to scale back the amount unfunded tax cuts. Gilt yields early in afternoon trading at some point declined between 25 bps + (2-y) up to 35 bps (+) 30-y. Easing tensions on the gilt market to some extent also supported sterling. Cable (temporarily) regained the 1.125 handle. EUR/GBP dropped to test last week’s correction low near 0.8650. However, the rally on UK markets gradually slowed as the market focus turned going into to the US CPI release (cf infra).

• After recent sharp rise in yields investors apparently assumed that the hurdle for a further hawkish repricing might have become rather high. US and German yields eased a few basis points going into the CPI data release. Unfortunately, market hopes for US (core) inflation topping out once again proved very premature. US headline inflation (8.2%) slowed less than expected. The dynamic in core inflation was even more worrisome. Prices excluding food and energy rose 0.6% M/M to 6.6% Y/Y, the fastest pace since 1982 (cf infra). In a logical curve inversion move US yields are rising between 22 bps (2-y) and 10 bps (30-y). The US 2-y yield set a new cycle top above 4.5%. The 10/30y yield are breaking/testing the 4.0% barrier. After another 75 bps Fed hike in November, markets now see a 2/3 chance of a similar additional step in December. EMU yields joined the US. Earlier EMU yield declines were reversed with German yields currently gaining between 12 bps (2-y) and 4 bps (30-y). In an interview (before the US CPI release), ECB’s Wunch said he wouldn’t be surprised to see the ECB policy rate exceeding 3.0% as he assumes the ECB has to go for a positive real policy rate at some point. The US upward CPI release evidently wasn’t good news for risk assets. The EuroStoxx50 is losing 2.0%, nearing last week’s cycle lows. US indices are ceding between 1.6 % (Dow) and 3.0% (Nasdaq) equally setting new YTD lows. UK bond markets keep a big part of their outperformance.

• The higher than expected CPI reversed an intra-day US setback, but gains for the US currency could have been even bigger. DXY trades at 113.65 (open 113.2). EUR/USD (currently 0.965 ) lost a full big figure but is holding above the cycle low (0.9536). USD/JPY jumped to exactly test the 1998 top of 147.66. The likes of the Aussie dollar (AUD/USD 0.618), the kiwi dollar (0.553) and the loonie (USD/CAD 1.395) are all setting new cycle lows. Remarkably, Cable (USD/GBP 1.12) even maintains part of this morning’s gains. EUR/GBP trades near 0.8650.

News Headlines

Swedish inflation accelerated in September from 9.8% to 10.8% (1.4% m/m), the first 10%+ reading in four decades. Using a fixed interest rate (CPIF), prices rose 9.7% y/y and 1.1% m/m. CPIF excluding energy, the Swedish central bank’s preferred gauge, came in at a three-decade high of 7.4%. The numbers are exactly in line with the Riksbank’s own forecast and make a strong case for further, aggressive tightening, especially combined with the persistently weak Swedish currency. Back in September, the central bank hiked by 100 bps to 1.75%. Any rate hike less than 50 bps at the final policy meeting of the year (Nov 24) would be a major surprise. EUR/SEK trades unchanged following today’s release, testing the 11 big figure – the weakest SEK level since the pandemic – extensively.

• Oof! US September CPI delivered a nasty surprise on all accounts. Starting with headline inflation, prices rose 0.4% m/m to be up 8.2% y/y. That’s less of a decline than the already tiny drop (from 8.3% to 8.1%) markets and analysts were hoping for. Core inflation accelerated more than expected. Monthly dynamics showed the same sharp increase as in August (0.6%), bringing the yearly figure higher from 6.3% to 6.6% (6.5% expected). Among the rare decliners last month were energy (-2.1% m/m) and used cars & trucks (-1.1%). Shelter (+0.7%), food (+0.8%) and airline fares and medical care (both 0.8%) were the main contributors.

Graphs & Table

US 2-y yield attacking the 4.50 % barrier.

EUR/SEK: higher inflation doesn’t help Swedish krone in an environment of global tightening.

USD TW DXY index gains on higher US inflation/yields, but doesn’t reach cycle top yet.

S&P hammered below key 3600 support area

Note: All times and dates are CET. More reports are available at which you may sign up to.

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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