Markets
- Everything sold off yesterday on a single catalyst: energy. Brent oil hit an intraday high of almost $109 per barrel. Prices eased eventually into the close to around $105 on reports that Saudi Arabia resumed oil flows through its East-West pipeline. But that merely prevented worse for the likes of core bonds. US Treasury yields surged between 5.4 and 8.2 bps in bear flattening fashion. The German bund curve bear steepened with net daily changes varying between +3 bps and 5.6 bps. ECB president Lagarde before the European Parliament said inflation risks remain tilted to the upside but there are no signs yet that higher inflation is becoming embedded. A measured approach remains appropriate, she said, adding that “While growth has been resilient, since our last meeting long-term interest rates have risen notably, which will slow growth and reduce pass-through by more than projected in our September exercise.” Euro area money markets pared tightening bets afterwards. The October implied probability fell to +/- 35%. We sense little appetite in (money) markets to push pricing beyond a 3.5% terminal rate. Precious metals and stocks on Wall Street dropped. On a sector basis, tech underperformed (-1% Nasdaq) while energy and consumer staples benefited. The US dollar strengthened. Technical breakthroughs remain absent so far but the greenback is on a gradual, steady course higher. Sterling was the notable outperformer despite the fragile risk environment. EUR/GBP finished near 0.858, GBP/USD near 1.325. Bank of England deputy governor Ramsden was the latest official to warn that rates may need to rise if upside pressures to inflation continue to build. Ramsden in the BoE’s latest decision sided with the 6-3 majority for a status quo. November odds gather pace with an almost 90% probability discounted. BoE’s Mann and Taylor speak as well today. The former is a hawk already in favour for a hike while the latter is one of the biggest doves in the committee. There’s also an avalanche of ECB and Fed speakers scheduled. In terms of economic data, the US releases the August JOLTS report and September Conference Board consumer confidence. They serve as the amuse in the run-up to Friday’s main payrolls dish. The European Commission’s confidence indicators are on tap while Belgian and Spanish inflation figures offer a first indication on Friday’s EMU reading. Broader market sentiment remains at the mercy of energy. Brent advances once again to $107.8 with the $110 barrier drawing near. The US 2-yr yield is 5 bps away from the 5% barrier, which would lift the whole curve above that psychologically important level. We continue to hold a bullish dollar bias. EUR/USD closes in on the YtD low at 1.1325.
News & Views
- The Reserve Bank of Australia (RBA) lifted its policy rate by 25 bps to 4.6% this morning, bringing it above the post-Covid peak to the highest level since 2011. Since the August meeting, some of the upside inflation risks are materializing though higher global energy prices, rapid growth in global prices for technology-related goods and firms either increasing the prices of their goods and services or looking to do so. Growth in output has slowed but, at the margin, was stronger than expected in the June quarter. There remains pressure on domestic capacity with growth in business investment and debt being strong (AI build-out). The RBA Board remains focused on ensuring that high inflation does not become embedded and will continue to do what is necessary to bring inflation sustainably back to target (including increasing the cash rate further). Australian money markets attach a 75% probability to another 25 bps move before year-end. The peak policy rate is estimated at 5% by spring next year. AUD/USD holds steady just above the 0.70-handle.
- Hungary’s debt management agency AKK yesterday raised its gross issuance plan for this year by HUF 4tn to HUF 20.4tn. Gross planned issuance of treasury bills will increase by HUF 1.64tn to HUF 3.17tn. The planned gross issuance of institutional HUF bonds and municipal government bonds rises by HUF 1.8tn to HUF 7.39tn. Smaller increases in planned retail and FX issuance fill the remaining gap. The revised funding need stems from a significant increase in net funding need. A higher budget deficit and pre-financing of EU-funds expected to arrive by year-end are the key drivers. Yesterday’s revised net issuance plan was already 87% done by the end of August.
