Markets
- The August US CPI inflation report temporarily lifted Fed rate hike bets for next week above 90%. Minutes after the release, two 25 bps rate hikes were fully discounted by year-end. Markets are trading choppy though as the inflation report didn’t give the hoped-for unequivocal signal. Headline inflation accelerated as expected by 0.4% M/M with the Y/Y-figure steady at 3.4%. Core CPI dipped from 2.5% Y/Y to 2.4% Y/Y (actually 2.45%). While being the lowest reading since March 2021, this outcome was also in line with expectations. The only deviation from consensus came from the monthly core CPI which came in at 0.3% instead of 0.2%. It was the strongest pace since April and is put against recent remarks by Fed governor Waller. He said that he would support holding rates steady if the disinflation process continued. In the past, several Fed members identified 0.2% on a monthly basis as threshold for disinflation towards 2% inflation target. Anything above that level no longer keeps the Y/Y-readings flat or falling. Our in-house KBC Nowcast model also suggests a pick-up in core CPI to 2.5% Y/Y in September and 2.65% Y/Y in October. It’s probably why the initial Pavlov-reaction from markets was a bear flattening of the US curve (US 2-yr yield +7 bps at one stage), a spike lower in equity futures and a stronger dollar. Next week’s Fed meeting now has a lot of self-fulfilling prophecy to it. Following the hawkish Jackson Hole speech by Fed chair Warsh and by putting the burden of proof at the August CPI, the Fed has little other option than to hike rates in order not to lose its credibility. If not, the central bank risks a violent sell-off at the (very) long end of the curve via higher inflation expectations. With the US 10-yr yield on the brink of breaking beyond the 2023 top at 5.02% (high since 2007), that’s a dangerous game to play. Then again, in light of this week’s violent core bond sell-off and with today’s figures still leaving some minor space for doubt, the print was insufficient to trigger strong directional moves. Especially with oil prices today sliding back from $110/b to $104/b. At the time of writing, the US yield curve bull flattens with yields unchanged (2-yr) to 5 bps (30-yr) lower. European yield curves steepen, correcting 4 to 5 bps at the front end and rising slightly at the very long end. EUR/USD tested first support at 1.1570 to currently trade back around the 1.16 big figure. European stock markets recover up to 1% today with key US benchmarks opening with similar gains.
News & Views
- World oil demand is forecast to decline by 2.5 mb/d in 2026, according to the International Energy Agency (IEA), 940 kb/d steeper than in last month’s Oil Market Report. The continuing impasse in negotiations between the US and Iran delays the prospect of a normalisation of flows into next year. Oil demand is projected to recover by 2.6 mb/d in 2027, narrowly offsetting this year’s losses. Steep losses of petrochemical feedstocks and refined product supplies, along with higher fuel prices, notably for diesel, will continue to weigh on consumption in coming months. The IEA warns that the widening differential between crude and refined products has pushed refinery margins to record levels in the Atlantic Basin. Total oil supply is set to fall by 5.7 mb/d to 100.7 mb/d this year, with the expected recovery in the Gulf now deferred until 2027. Production is set to rebound by 8 mb/d in 2027. Inventories have so far played a crucial role in balancing the market. Since the start of the war, global observed oil inventories have fallen by 507 mb, equal to an average draw of 2.8 mb/d. With buffers shrinking and the global refining system stretched to the limit, the need for progress in resolving the conflict in the Middle East – and the Russia-Ukraine war, which is now in its fifth year – is greater than ever to avoid further market tightening and demand destruction.
- The CEO of Hungary’s debt management agency AKK, Gergely Tardos, says that Hungarian (long-term) bond yields have room to drop by another 150-250 bps in the euro convergence progress. That’s also what’s shielding Hungary from current international turbulence which tends to hit small emerging markets disproportionally. The Hungarian 10-yr bond yield peaked around 7.5% mid-March and is currently trading around 5.75%. Tardos told his audience today that Hungary bond sales are already attracting a wider investor base (including long-term buy-and-hold investors such as sovereign funds) since the Magyar government declared the intention to join the EMU.
