• As was the case earlier this week, markets couldn’t do anything else but guessing which clues Fed Chair Powell will give on the Fed’s intentions in the new era where ‘forward guidance’ is decisively removed from centrale bankers’ toolkit. It’s some kind of ‘squaring of the circle’ problem. Is there still room to clarify the Fed’s reaction function to developments in inflation and/or growth? Or will a more in depth analysis of the neutral policy rate provide a yardstick on the degree of monetary tightness. We’ll know later today. Whatever, markets concluded from recent Fed speak that the message in one way or another should contain some ‘hawkishness’. A further headway of the ‘frontloading’ idea translated this month into a further curve flattening. After a correction yesterday, yields are again drifting north. US yields are gaining up to 2 bps points at the belly of the curve (5 & 10-y). Yields initially printed higher, but eased after weaker than expected US July spending and income data and a softer price deflator (-0.1% M/M; 6.3% Y/Y). European yields rise 3/4 basis points across the curve. From a technical point of view, the curve flattening trend brought the 2-year US yield (3.37 %) again within reach of the 3.45% mid-June top. Will Powell’s message be strong enough to attack/surpass this level and start a new episode in leaving behind the era of ample/excessive support of aggregate demand? Even after this months’ repositioning, the US 10-y yield (3.06%) only returned half way in the 2.51%/3.50% range. Maybe, quantitative tightening shifting to full speed next week, might support a further rise of LT yields. However, we don’t expect Powell to elaborate much on this topic.
• On other markets, (especially US) equities recently showed remarkable resilience even as the Fed slowing aggregate demand is an essential part of its anti-inflation strategy. European equities this morning opened with modest gains, but already slipped back into negative territory (Eurostoxx -0.25%). This might partially mirror investor caution going into Powell’s testimony. Persistent headlines on high energy prices eroding European and UK consumers’ purchasing power probably are also in play. US futures indicate a slightly negative open. More concrete indications on the Fed deliberately slowing demand is in theory no good news for risk assets and a further challenge for the low-volatility environment.
• In FX, the dollar slightly disappoints. The DXY index slipped lower to currently trade in the 108.30 area. Still, the 109.3 cycle top still isn’t that far away in case Powell’s expected hawkishness would revive a more profound risk-off mood. EUR/USD (1.0010) also manages to stay away from the 0.99 low. After leading the broader bond-market sell-off of late, UK markets are some kind of a ‘dovish’ outlier. Short-term UK yields are easing up to 3,5 bps. This weighs on sterling. EUR/GBP rebounds to the 0.8460 area. The UK cost of living crisis again takes center stage after Ofgem announced an increase in the cap on energy bills that might double the cost of energy for households with average consumption (cf infra).
• UK energy regulator Ofgem raises the price cap which governs the maximum gas & electricty bill for UK households by 80% in October, from £1971 at present to £3549 (a year). That’s more than the £2800 expected only three months ago. Back in May, they already lifted this ceiling from £1277 in October last year. The significant increase come because of higher wholesale price stemming from the Russian war in Ukraine (supply reduction) while government support announced in May (£15bn) no longer covers the gap. All else equal, UK households will probably face a new plafond increase in Spring next year with industry forecasts suggesting that it could go as high as £6600 a year.