Markets
US September CPI came on the strong side of expectations yesterday. What spooked investors in particular was the 0.3% month-on-month increase in core inflation, which lifted the annual print to 2.6%. The 0.3% m/m was faster than the 0.2% expected and simply too high to be consistent with inflation returning to 2%. It suggests an initial energy-driven price rise – which pushed up headline inflation to 3.7% – is filtering through, unhindered by an economy that’s firing on multiple cylinders. The market reacted as if stung by a bee: short-term yields surged up to 15 bps with October rate hike odds jumping from about 20% to 55%. The long end of the curve followed from a short distance (+/- 10 bps). A violent move that all but completely turned around into the close. The US yield curve bull flattened with the 2-yr yield retaining less than 1 bp from the initial 15 and the 10-30yr bucket dropping between 2.5 and 3.5 bps. Haven flows explain at least part of the U-turn. Main indices on WS opened lower and grinded further south throughout the session. The Nasdaq lost almost 2%. Chips stocks amid a broader AI-related rout are suffering. The Philadelphia Semiconductor index tumbled more than 4%. Asian stocks this morning witness the fall-out. The South Korean AI bellwether index Kospi tanks almost 9%, triggering circuit breakers. It’s keeping Treasuries very well bid, pushing down rates by another 7-8.5 bps across the curve. A drop in oil prices towards +/- $104 supports the move. Reuters citing a US official said president Trump is considering easing sanctions shadow fleet vessels that have transported oil and oil products from Russia, Venezuela and Iran. The goal is to ease record high global freight rates. European yields mimicked US intraday movements, leading to net daily changes varying between -2.1 bps (2-yr Bund) to +1.2 bps (30-yr). The US dollar yesterday punched to a new 18-month high against the euro but forfeited part of the gains as US rates began retreating throughout the post-CPI session. EUR/USD fell as low as 1.1113 before closing at 1.1157. Similar interest rate dynamics keep the greenback in the defensive this morning, despite outright risk off. Perhaps its AI-related source keeps investors hesitant to load up on USD’s too. EUR/USD currently takes out the 1.12. Upside potential in case of a (low-conviction) further dollar correction stretches to 1.1325.
Stock sentiment will dominate trading today and might continue to do so going into the earnings season. The latter begins heating up from next week on. The economic calendar centers around US retail sales and, especially after yesterday, the September PPIs. Some more ECB quotes from Bangkok hit the wires today. Dutch governor Knot expects more negative supply shocks in the coming years, which means the ECB would be forced in adopting a posture mildly on the hawkish side. Knot endorsed the “measured approach” the ECB is taking to the current shock, saying you have to do what is necessary, but as little as possible. Knot also commented on lingering speculation on TPI (“way too early to talk about it”) or halting QT (“which should be considered based on a renewed assessment on structural liquidity needs rather than because of bond market conditions”).
News & Views
Australian employment decreased by 39.3k in September with details showing a big divergence between higher full-time employment (+34.4k) and lower part-time employment (-73.7k). Hours worked increased by 0.1% in September, with the same difference between full time (+0.4%) and part time (-1.5%) jobs. Overall, employment and hours worked are closely aligned in annual growth, up 1.2% and 1.3% respectively. The unemployment rate stabilized at an upwardly revised 4.7% (highest level since October 2021), but the participation rate fell from a downwardly revised 67% to 66.8%. The Australian Bureau of Statistics does warn for potential quirks following the implementation of a new collection model. The Aussie dollar trades a tad weaker following this morning’s release with AUD/USD changing hands around 0.6950. Australian government bond yields trade around 9 bps lower across the curve this morning with the softer labour market report adding to the global bond rally.
Belgian PM De Wever is willing to set aside his plans to deliver on a multi-annual budget entailing €10bn of savings. Government parties are deadlocked over a potential VAT increase which needs to beef up government income. Since he categorically refused entering the system of a provisional budget, people close to the PM indicate he wants to work on two separate tracks: a full 2027 Budget to be agreed by the end of month and the €10bn savings track to be discussed afterwards.
