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ECB Inflation Debates Heats Up

Market movers today

  • Today we have a few market movers in the afternoon.
  • First we get US jobless claims, where we will likely see a further decline below 350,000.
  • In Denmark, we get August FX reserves and we expect an increase, although not due to intervention (see more below).

The 60 second overview

ECB: More comments from ECB members hit the wires yesterday. Bundesbank President Weidmann mirrored the hawkish comments of Knot and Holzmann and warned that ECB should not disregard the risk that inflation could accelerate faster than currently anticipated. In contrast, Bank of Greece governor Stournaras countered that the ECB should not over-interpret the current spike in inflation, a view echoed later in the day by Slovenia’s Vasle. With inflation expected to print above the ECB’s new 2% symmetric inflation target for the remainder of this year, hawks in the ECB’s Governing Council have become more vocal about pro-inflationary risks and the need to slow bond purchases. This sets the scene for some interesting discussions at next week’s ECB meeting. That said, we expect the big debate about the future of the PEPP programme only to take place at the December meeting.

Employment: While European manufacturing employment continued to increase during August, US employment indicators disappointed yesterday with the ISM manufacturing employment index falling back into contraction territory and the private sector ADP employment report showing only 374k jobs created during August (vs. expected 638k). This leaves some downside risks for tomorrow’s non-farm payroll report, which will be crucial for the Fed’s tapering plans. EUR/USD advanced, while 10Y US Treasury yields fell back below 1.30%.

Oil: OPEC+ agreed to proceed with its existing plan for gradual oil supply increases, as ministers ratified the 400,000 barrel-a-day output hike scheduled for October. Oil price increases have been an important global inflation driver this year, but despite the planned supply increase, oil prices were little changed on the announcement, with Brent holding broadly steady at USD/bbl 71.3.

Equities: Equities started September on a positive note with gains in most regions and across most sectors. Energy and materials the only sectors lower as metal and oil price fell yesterday. Growth and small cap stocks outperformed as the sweet spot for equities got more support from macro data yesterday. Asian stocks mixed this morning as China on the one hand continues to crack down on big tech while the PBOC on the other hand softened a bit by making more low-cost funding available for SMEs. European and US futures are slightly lower this morning.

FI: The recent rise in yields took at bit of a pause yesterday, while we wait for the US labour market report tomorrow. Furthermore, spreads between the core-EU and periphery tightened a few bp yesterday. Germany sold EUR 5.5bn in a new 30Y benchmark at a very tight price, where investors paid 1bp relative to fair value and with a bid-to-cover for more than 3.

FX: Yesterday brought yet a session with modest losses to the greenback while commodity and industrial sensitive currencies gained. The terms of trade impact from rising metal prices has hit JPY somewhat in recent sessions and also EUR/CHF has edged higher this week. EUR/NOK is now testing 10.30 while EUR/SEK is hovering below 10.20.

Credit: CDS indices continued to outperform cash bonds yesterday with iTraxx Xover tightening 2bp, taking it to 226bp (thus touching the post-pandemic low) and Main tightening 0.3bp (to 44.5bp). HY bonds closed unchanged and IG saw a small widening of around ½bp.

Nordic macro

Danmarks Nationalbank is set to release FX reserve figures for August today. There are several issues to keep an eye on this time. The FX reserve will likely increase significantly after Danmarks Nationalbank was allocated DKK 29bn in August in so-called Special Drawing Rights from the IMF. Meanwhile, public finances have developed somewhat better than expected in August, so the Debt Management Office may well have decided to reduce the issuance of Commercial Papers further from around DKK40bn in July. This would pull in the opposite direction. Finally, Danmarks Nationalbank may have intervened to buy additional foreign currency in August, which would add to FX reserves. That being said, the Danish krone has been trading a tad weaker against the euro in the past month, so Danmarks Nationalbank is probably more likely to have taken a break after intervening every month since February.

Danske Bank
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