Wednesday, August 31, 2022

Daily Market Overview

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• European inflation topped 9% y/y estimates to be up a record 9.1% on the year. French HICP numbers earlier in the session (down from 6.8% to 6.5% vs 6.7% expected) thus provided a false sense of comfort. Core inflation (ex food and energy) accelerated from 4% to 4.3%, suggesting very strong underlying price pressures. German Bundesbank president Nagel said he sees risks that high inflation will persist even longer and called for decisive action at the policy meeting next week under the form of a “strong” rate hike. Markets are stuck at a 75% chance for a 75 bps move. Initially, the numbers helped European (swap) rates to add up to 9 bps at the front end of the curve. Rates’ momentum temporarily dwindled a bit around noon. Yield gains were capped in lockstep with gas prices easing for a third day straight, even as flows through Nord Stream 1 pipeline are halted until Sep 2 and risks are that they won’t return (or at reduced capacity). Oil prices drop significantly as well. A barrel of Brent sheds more than 3% and loses the $100 mark. At the time of writing, net changes for European swap yields range between 0.6 bps (30y) and 5 bps (2y). The US yield curve bear steepens, adding 1.3 bps at the front and 2.2 bps at longer tenors. US rates recovered quickly from a below-consensus ADP job report (132k vs 300k expected). A new methodology makes the outcome difficult to assess let alone judge what it could mean for the official payrolls on Friday. UK Gilts underperform again today. Yields advance 9.1 bps to 10.6 bps. Stocks face minor selling pressure. The EuroStoxx50 is down 0.3% and Wall Street opens mixed with the Nasdaq (+0.4%) outperforming.
• The Norwegian krone stands out in currency markets today. The combination of faltering oil prices and a central bank announcement (see below) is a one-two punch for the NOK. The Swiss franc second to last in the G10 scoreboard. EUR/CHF hits the highest levels since early August (0.98). The euro and the dollar are both trading mixed, resulting in directionless EUR/USD moves. The pair oscillates around parity. DXY (trade-weighted dollar) made a fresh attempt to grab the 109.3 resistance zone but lacked momentum. It barely tested that level. Sterling stays under pressure. Perhaps some nervousness going into the final round of the UK leadership contest (on Friday) is kicking in. EUR/GBP surpasses the 0.86 big figure. It is now changing hands at the strongest level since early July.
News Headlines

Polish inflation accelerated again in August. The 0.8% M/M increase (from 0.5% in July vs 0.2% expected) resulted in a Y/Y reading of 16.1% (from 15.6% vs 15.4% expected), the highest figure since October 1996. Continued elevated price pressure tips the odds in favour of a continuation of the Polish central bank’s rate hike cycle when they meet next week. Several NBP-members recently floated the idea of one or two final small rate hikes by 25 bps before calling the cycle peak. Such scenario seems premature in light of the recent inflation print. The path of energy prices and an end to supportive measures by the government to households even suggest that inflation could surge even more in coming months. The Polish zloty ignored today’s release. The Polish zloty swap curve inverted further with yields rising by 3.9 bps (20-yr) to 18 bps (2-yr).
• The Norwegian central bank announced that it will purchase FX on behalf of the government equivalent to NOK 3.5bn per day in September. That’s significantly more than the 1.5bn per day in August. The Norwegian government receives revenues in both NOK and foreign currency from petroleum activities. Some of these revenues are used to finance a planned central government budget deficit, the structural non-oil deficit. The remainder is saved in foreign currency in the Government Pension Fund Global (GPFG). The Norwegian krone loses out against the euro after the announcement with EUR/NOK rising from 9.8 to 9.95.

Graphs & Table

European 2y swap rate sets new cycle high as record EMU inflation ups the ante for next week’s ECB meeting.

EUR/NOK: one-two punch for Norwegian krone as oil prices drop and Norges Bank more than doubles FX purchases.

Trade-weighted DXY struggles to get beyond 109.3 resistance level. Payrolls to give the go ahead?

EUR/GBP surpasses 0.86 for first time since early July as craks in sterling get bigger.

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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