Sat, Nov 27, 2021 @ 19:45 GMT
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Hawkish ECB Comments Weigh On European Bond Markets

Market movers today

  • Today is big PMI-day with a range of PMIs out across Europe including the Nordics, see more below.
  • In the US, we get ISM manufacturing, which will likely continue to reflect bottlenecks in the manufacturing sector.
  • OPEC+ is expected to meet later today.

The 60 second overview

Hawkish ECB comments: Yesterday’s market sentiment was dominated by a better than expected inflation print in the euro area as well as hawkish comments from Knot and Holzmann. While both governing council members called for slowing the bond purchases, something that has turned out to be market baseline, the notable highlight from both interventions is that both caution against applying the same flexibility to the APP that has been applied to the PEPP. This will be the main discussion point along with QE calibration this year, where we expect the big battle only to come at the December meeting. 10y German yields rose 6bp yesterday with BTP-Bund spread widening 4bp.

Euro area inflation: The euro area flash HICP rose to 3.0% in August, highest since November 2011 (from 2.2% in July). The energy price inflation remained elevated but the biggest pro-inflationary factor this month was the jump in core inflation to 1.6% (from 0.71% in July). German VAT base effects played an important role, but the broad-based increase in both services and goods price inflation suggests that underlying inflation pressures are also gaining momentum (likely helped by cost-push pressures on supply chains and increased demand for travel and recreational services during the summer). The high print fuels the ECB hawks argument to push for an end to crisis fighting tools sooner rather than later.

China PMI: The private Caixin PMI survey in China declined to the sub-50 territory for the first time since the start of last year, pointing to a contraction in the manufacturing sector. While this is also a result of lockdowns due to earlier virus cases, this is also part of a general manufacturing peak that is behind us.

Equities: No major moves in equities yesterday as investors are waiting for the next driver to appear. Styles and sectors very tightly bunched and very few areas sticking out yesterday. Equity investors are so far ignoring disappointing key figures but their confidence will probably be tested again today as more heavyweight numbers are due. In US yesterday Dow -0.1%, S&P 500 -0.1%, Nasdaq -0.04% and Russell 2000 +0.3%. Asian markets are higher this morning lifted by upbeat tone in Japan. European futures starting September roughly 0.5% higher while US ones are only slightly higher this morning.

FI: A perfect storm hit bond markets yesterday. With a higher than expected inflation print in the euro area, fuelled by hawkish comments from Knot and Holzmann plus a 30y syndication from Germany, on top of European rates already trading heavy after the UK bank holiday from the start of the day, the result was Bunds almost 6bp higher and BTPs-Bund spreads 4bp wider compared to Monday close. Core European bonds underperformed US treasuries by 3bp, amid a curve steepening move. Cash bonds underperformed swaps, with e.g. Bund ASW tightened 2bp to 37.5bp.

FX: In a session generally characterised by USD weakness and EM performance PLN, CZK and ZAR were the primary outperformers yesterday. Normally, this would be a beneficial environment for NOK, yet the Norwegian currency was the biggest underperformer in FX majors space with EUR/NOK back in the mid 10.20s. EUR/SEK edged modestly higher but closed just below 10.20.

Credit: The mood remained decent in credit markets yesterday where iTraxx Xover tightened 0.8bp (closing in 227.9bp) and Main 0.5bp (to 44.8bp). HY bonds tightened 1bp and IG closed around ½bp wider.

Nordic macro

In Norway, the manufacturing PMI should drop well below 60 (no consensus) as the global manufacturing cycle clearly has peaked. As always, the July and August data are volatile, as the number of respondents tends to be small, so we put less emphasis than usual on the figure.


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