Tuesday, September 20, 2022

Daily Market Overview

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•  Today’s story is a quite straight-forward one. Accelerating Japanese inflation numbers (3% Y/Y) showed during Asian trading hours that there’s no escaping the inflation trends. Even if the Bank of Japan is expected to remain in denial on Friday. German producer price inflation set the tone in the early stages of European dealings. PPI accelerated in August from 5.3% M/M to 7.9% M/M while consensus hoped for a slowdown to 2.4% M/M. The Y/Y figure jumped from 37.2% Y/Y to 45.8% Y/Y. In case you wondered, Germany’s business model is dead. Energy was the main driver with a 20.4% M/M increase. PPI less energy rose by 0.4% M/M and 13.8% Y/Y. The Swedish Riksbank completed the hattrick by kicking off this week’s central bank mania with a larger-than-expected 100 bps rate hike, from 0.75% to 1.75%. It’s telling that one of the central bank’s with the most dovish DNA opts for an almost unmatched move. The opening paragraph said it all: “Inflation is too high. It is undermining households’ purchasing power and making it more difficult for both companies and households to plan their finances. Monetary policy now needs to be tightened further to bring inflation back to the target.” Updated and increased inflation forecasts (7.8% this year and 5.1% next for CPIF) warrant an increase of the expected policy rate peak from >=2% to >=2.5%. It’s also telling that the Swedish krona failed to profit from the outsized rate hike. On the contrary, EUR/SEK pushed beyond the 10.81 YTD high. A vote of no confidence in the (too low) policy rate peak? In any case a warning shot to other central banks coming up.
• The global core bond sell-off continued unabatedly. US yields increase by 4 bps (2-yr) to 8 bps (30-yr). German yields add around 13 bps across the curve. The fact that the very long end of the curve underperforms compared to previous today could be a reflection of higher-expected policy rate peaks. The sell-off on the bond markets pulls main European and US stock markets over 1% lower. The dollar thrives in this kind of market climate with EUR/USD back at 0.9970. Sterling performs relatively well at EUR/GBP 0.8750.
News Headlines

Headline Canadian inflation slowed more than expected in August. Inflation declined 0.3% M/M slowing the Y/Y measure from 7.6% in July to 7.0%. Some of the ‘core’ inflation measures (Core median 4.8%, Core trim 5.2%) also printed lower than expected. Energy prices declined 6.4% M/M as did prices of goods, easing for the second consecutive month (-0.8% M/M). Services inflation still rose albeit a modest 0.1% M/M. Food prices gained 0.8% M/M and were the largest positive contributor in monthly terms. The softer than expected inflation report is fueling the debate as to whether the Bank of Canada will finally be able to slow the pace of rate hikes. It already raised the policy rate to 3.25% (+0.75% in September), bringing it above what it sees as a neutral level. The Canadian 2y yield today eases 5 bps against the broader uptrend in yields. The loonie stays under pressure with USD/CAD regaining the 1.33 barrier, near the YTD weakest level of the Canadian currency against the USD.

• Eco data in Poland published today painted a mixed picture. Average wages in August were reported at -2.7% M/M and 12.7% Y/Y, down from 15.8 Y/Y in July. Wage growth was weaker than expected, but the series is notoriously volatile. Employment growth declined 0.1% M/M to 2.4% Y/Y (unchanged from July). Production rose 0.7% M/M to be up 10.9% Y/Y, while a further decline was expected. Producer price inflation was materially stronger than expected at 0.8% M/M and 25.5% Y/Y and the July figure was upwardly revised, too. After raising the policy rate by 0.25% to 6.75% earlier this month, the MPC of the National Bank of Poland ponders whether it can bring the tightening cycle to an end. Markets still take into account the possibility of one or two 0.25 bps ‘fine-tuning hikes’. The zloty today weakens to trade at EUR/PLN 4.726.


Graphs & Table

Core 2-yr yields extend their push higher following Japanese CPI, German PPI and a jumbo Riksbank rate hike

Nasdaq: core bond sell-off spills into weaker equities

USD/CAD: first slightly disappointing payrolls and now weaker than expected inflation. BoC first to slow the tightening cycle? Loonie anticipates

EUR/SEK: even not a 100 bps rate hike can help the SEK

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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