Thursday, October 20, 2022

Daily Market Overview

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• Global markets painted somewhat of a mixed, indecisive picture today. This morning it looked that yesterday’s pattern of higher yields, lower equities and a strong dollar would continue. US yields at all maturities again touched new cycle peak levels (US 2-y 4.61%; 10-y 4.175%) as was the case for short term German yields. Oil prices (Brent $93 P/B) rising on headlines that China is considering easing its strict Covid approach added to some kind of inflationary narrative. German September PPI also again printed at an astonishing 45.8%. However, sentiment both on bond markets and on equity markets gradually turned a bit more benign. In technical trading, German yields currently gain about 3/5 bps across the curve in a mild steepening, with swaps again outperforming Bunds. US yields are trading slightly off the intra/cycle peak levels gaining a similar 2/3 bps. The headline index of the US Philadelphia Fed Business survey improved marginally, but especially forward looking indicators suggested more difficult times ahead. US weekly jobless claims at 214 000 stayed lower. The data didn’t bring a clear enough story for markets to react too. European equities are switching gains for losses andvice versa. US indices open modestly higher (0.25/50%).

On FX markets, the dollar couldn’t hold on to risk-off driven strength in Asia, joining an overall indecisive market pattern. DXY eased to currently trade near 112.6. EUR/USD again tries to regain the 0.98 barrier. Still the pair fails to recapture any technical relevant reference, not even this week’s top at 0.9876. The cat-and-mouse between markets and Japanese authorities on the fate of the USD/JPY 150 barrier simply continues. The pair this morning briefly jumped beyond, just to return back lower almost immediately. There is plenty of speculation on FX interventions, but the only interventions one currently can be sure of are verbal from Japanese government officials as they reiterated they won’t tolerate speculative moves or unwarranted volatility.

• Evidently, we again have to dedicate a small sperate paragraph to the UK. Who dares drawing any conclusion on what Liz Truss’ resignation means for sterling or for gilts? Sterling gained from EUR/GBP 0.8740 to 0.8700 immediately after the announcement. Gilts outperform Bunds and Treasuries with the 30 y yield easing 4.0 bps. Maybe comments of BoE Deputy Governor Broadbent are more relevant as he questioned whether the BoE will have to raise interest rate as much as investors expect it to do. The BoE still balancing the weight it should give to both growth and inflation is no help for sterling, even not after the resignation of Liz Truss.

News Headlines

• The Turkish central bank (CBRT), led by Kavcioglu (but not really), slashed rates by a bigger than expected 150 bps to 10.5%, following two consecutive 100 bps cuts in August and September (and 500 bps in 2021). Inflation rose to a staggering 83.45% in September with more in the pipeline as PPI soared above 150%. Yet, the CBRT focuses exclusively on growth and job creation. “In a period of increasing uncertainties regarding global growth as well as further escalation of  geopolitical risks” it deemed today’s action necessary and even penciled in a similar move for November. This would then spell the end of the cutting cycle with the policy rate back into the single digit area Erdogan called for a few weeks ago. The Turkish lira is holding suspiciously steady against the USD at record lows of 18.574. EUR/TRY ekes out a small gain to 18.25.

• Polish data were a mixed bag today. Employment eased marginally in September, declining 0.1% m/m following a same-sized decline in August. It may be a first sign of the labour market cooling down a tad. Still, employment is 2.3% higher compared to a year earlier. Wage growth is still going strong with 1.6% m/m and 14.5% y/y. Both measures surpassed expectations. PPI inflation undershot the bar. A 0.2% m/m rise ended up in a 24.6% y/y while stabilization at 25.5% was expected. This so-called factory inflation in June hit a 27-y high (25.6%) and is now tentatively topping out. Staying in the factory atmosphere, September industrial output rose 9.8% both m/m and y/y (surpassing 8.8% estimates for both). Manufacturing was the biggest contributor, jumping 11.2% m/m. The Polish zloty strengthens EUR/PLN 4.77 today but that has more to do with a better sentiment towards CE-currencies in general.

Graphs & Table

EMU 2-y swap yield fighting the 3,05/3 10% cycle top, for now with no break.

UK 30-y year returns to below 4.0% as UK is looking for a new Prime Minister.

EUR/PLN: zloty rebounds further off recent low against the euro as regional tensions ease.

USD/JPY: cat and mouse game around 150 barrier continues.

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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