Markets
Last week’s diverging trend in inflation expectations (US vs EMU) continues today. 5y5y forward inflation swaps added 10 bps in the US since Monday September 28 while they stabilized in the euro zone. The rising inflation expectations cause US Treasuries’ underperformance vs German Bunds. The US yield curve bear steepens with yields rising by 0.2 bps (2-yr) to 4.4 bps (30-yr). The US 10-yr yields trades above 0.72% for the first time since the end of August. From a technical point of view, we could be heading to the August top of 0.79%, which serves as the upper bound of the standing trading band. The German yield curve moves in similar fashion but daily changes are limited between +0.3 bps (2-yr) and +1.7 bps (30-yr). 10-yr yield spread changes vs Germany narrow up to 3 bps (Greece).
The dollar can’t profit from the rising yield differential between the US and Europe. An obvious reason is the fact US real yields tend to decline further. The combination of softer real yields and higher inflation expectations is harmful for any currency. Add today’s positive risk climate and you get why the US currency is struggling. The trade-weighted greenback (DXY) slips below last week’s low of 93.53. EUR/USD returns north of the 1.1754 bottom of the mid-August to mid-September trading band. A sustained stay here calls off the end of September correction lower in EUR/USD and turns the technical picture more neutral again in the short run. USD/JPY changes hands around 105.60 which is a tad stronger than this morning’s level.
Most European indices gain up to 1%. The main move occurred at the opening bell with US President Trump’s recovery, House Speaker Pelosi’s stimulus hope and a positive brexit drum beat inspiring traders. However, we remain skeptical on the lasting effect of all of these topics. We attach a low probability to pre-election US fiscal support while brexit trade talks will most like go to over-time again, potentially causing ugly mood swings. Sterling already took quite some advance on this weekend’s Johnson/von der Leyen meeting and consolidates today. EUR/GBP treads water in the 0.9075 area.
Eco data included a stronger than expected rebound in EMU retail sales (4.4% M/M in August; outdated from a market point of view) and better than forecast September US services ISM (57.8 from 56.9 vs 56.2 expected). Details show steady activity (63 from 62.4), rising new orders (61.5 from 56.8) and the first >50 employment print since the start of the Covid-pandemic (51.8 from 47.9). US stocks profit, Treasuries extend their fall, but the dollar can’t gain.
News Headlines
A strike at Norwegian offshore oil and gas fields on pay that started last week, was joined by more workers today. The strike will cut Norway’s output capacity by about 330 000 barrels of oil equivalent per day, 8% of total production. According to Reuters calculations, 60% of the cuts are natural gas. Even so, the Norwegian production cut might at least partially have contributed to today’s rise in the oil price. After last week’s setback, oil regained the $40/b level. The impact on the Norwegian krone has been limited so far. EUR/NOK traders in the 10.89 area.
Turkish inflation eased slightly in September printing at 0.97% M/M and 11.75% Y/Y (from 11.77% in August). Markets expected a rise north of 12%. Ongoing high inflation and the central bank’s reaction to this development are an important driver for the Turkish Lira. The lira very briefly strengthened to the EUR/TRY 9.07 area immediately after the release of the inflation report. However, gains could not be sustained. EUR/TRY currently trades in the 9.15 area, with last week’s all-time top at 9.21. A continuation of the military action between Armenia and Azerbaijan probably outweighed the mildly positive news from the data. The Russian ruble remains under pressure, too.
