Sunset Market Commentary

Markets

• The Japanese yen pays the price for a hyped-up Bank of Japan policy meeting that failed to live up to the hawkish expectations. US Treasury Bessent suggested that he had inside information about what Japanese policymakers (including at the BoJ) would do and dared markets to bet against him. BoJ member Takata added to hawkish bets by offering the possibility of a large-sized rate hike and/or back-to-back tightening. While governor Ueda wouldn’t rule out either of those options, the overall tone of the presser was mixed, at best. He talked about the need to avoid prices deviating from target but said the same about rapid hikes causing asset price swings. The split 7-2 vote adds to the uncertainty about policy going forward. It appeared that the BoJ is less united on the need for tight(er) monetary policy than the market had assumed. USD/JPY surges to the 158 big figure. For comparison: Bessent and Takata had pushed the pair from 160 to as low as 153 earlier this month. Japanese yields tanked but recovered gradually afterwards to end around 1 bp lower across the curve.
• Yields elsewhere edge higher across maturities but especially the shorter ones. It simply appears to be the natural drift, since the usual suspect, energy, is only slightly up for the day and news value from the eco calendar or policymakers, including ECB’s Lagarde at an informal finance minister meeting, was limited. Maybe president Trump’s comment yesterday that he’s approaching a “big decision” on whether to resume large-scale attacks on Iran to end the war is lingering. Anyway, US Treasury yields climb between 4 and 7.5 bps going into the weekend with the 2-yr holding near its recent high. German yields jump up to 6 bps at the front and is, at current levels, on track for the highest closing level in around three years. Intra EMU-spreads are widening and OATs again underperform. Markets were more put on alert than soothed by finance minister Lescure saying the government shouldn’t “throw out the anchor of 3%”. It puts the spotlights straight back at the country’s dire public finances. The OAT/Bund spread tops 100 bps for the first time in 14 years. OATs vs swap is just shy of that psychologically important level. Belgium’s spread began to increase rapidly since this month as well towards a 1-yr high vs swap and 2-yr vs Bund. UK’s 2-yr yield bounces back 11 bps as the BoE’s signal it is preparing a hike potentially as soon as November sinks in. The market-implied probability nears 90%. Currency moves outside the yen are muted. The dollar has a slight upper hand in technically insignificant trading. EUR/USD eases to 1.146, simply returning yesterday’s minor gains. EUR/GBP steadies around but below 0.86. Stock markets differ in direction with Europe down 1.4% but WS opening with minor gains.
• Next week is an interesting one with September PMIs on tap. For Europe in particular, the market will be looking for signs of ongoing economic resilience despite the risks posed by sharply risen energy prices. The ECB last week took notice of what it called a more than expected resilient economy, making the case for a second rate hike a no brainer. A slew of smaller central banks are scheduled to meet, from Hungary (expected unchanged at 5.5%) over Switzerland (0%, unchanged) to the Swedes (1.75%, unchanged) and Norges (4.5%, +25 bps). And there’s the high-profile summit between US president Trump and Xi Jinping on Thursday. The most likely topics to be covered include trade, critical minerals and supply chain security, AI and of course the geopolitical environment.

News & Views

• The ECB released its August consumer inflation expectations survey today. The perceived inflation rate over the past 12 months matched July’s 3.5% but expectations for inflation increased over all horizons. The one-year ahead gauge ticked up to 3% from 2.9%. Three years from now, consumers see inflation hitting 2.9% compared to 2.7% in July. The 5-year measure quickened to 2.5% from 2.4%. Expectations for nominal income growth over the next 12 months were unchanged (1%), as were expectations for spending growth over the next 12 months (3.6%). Economic growth for the year ahead stood at -1.2%, the same as in July while the expected unemployment rate in 12 months’ time decreased to 11%. The survey was taken between August 5 and 24 so missed out on the September rally in energy prices.