It’s risk-off today, nothing more, nothing less. Reasons for taking some chips off the table vary and aren’t new or anything but, as always, are difficult to predict if or when they will take the upper hand in trading. The spread of Covid-19/Delta and with it curbed economic activity (particularly in Asia) is the most obvious (yet least original) trigger. It feeds into already lingering market uncertainty about the hoped-for strong recovery. Some large banks cautioning their clients about the (US) equity outlook is weighing on sentiment as well. Finally, tomorrow’s ECB policy meeting also casts a shadow over markets as it is now widely expected the central bank will take a first step towards normalizing policy to the post-pandemic era. Even if it is a minor or technical adjustment, it could be regarded as a sign of the times that ultra-easy policy isn’t here with us indefinitely. Objectively speaking, it would be a vote of confidence from the ECB in the European economy. In today’s market mindset however, it means lofty (equity) valuations based on forever-low interest rates are being questioned. European equities slumped 1.5% in early trading but cut losses in half by now with sentiment further improving as WS opens (mixed). Main beneficiaries of today’s risk aversion are the usual suspects: USTs and German Bunds with the former outperforming. The US yield curve bull flattens, losing 1 bps (5y) to 2.8 bps (30y). The US10y yield sheds 2.2 bps ahead of tonight’s $38 bn auction and a potentially interesting speech by Fed heavy weight Williams. German yields give up 1 bp (5y) to 1.7 bps (30y) but with the 10y tenor (-1.4 bps to -0.34%) sticking north of the recently captured -0.35% resistance (now support). The dollar tends to profit from risk-off on currency markets and today was no exception. EUR/USD eases further back south to heavily test support at 1.1826. The trade-weighted USD (DXY) extends the rebound from the 92 area that started yesterday to 92.67 currently. The greenback loses a tight battle vs the yen with USD/JPY slightly down for the day (110.25).
After easing in July from 5.3% to 4.6%, Hungarian August inflation again rose 0.2M/M and 4.9 Y/Y. A smaller rise to 4.7% was expected. Core inflation rose to 3.6% from 3.5%. Headline inflation is expected to accelerate further in coming months and might only be slightly below 5.5% at the end of the year. A substantial slowdown is expected from early next year. At the September policy meeting, the MNB will mostly likely upwardly revise its inflation forecasts. We expected the MNB to slow down its rate hike cycle from 30 bp per month to 15 bp till the end of the year. However, the August data raise the probability of another 30 bp rate hike at the September 21 meeting. The forint today fell prey to profit taking after a strong, MNB driven run in August. This setback was mainly due to recent rise in core markets’ LT yields and today’s risk-off repositioning. EUR/HUF rebounded to the 350 area. A further, protracted correction of the forint, if it were to occur, might complicate the MNB’s decision making process.
Turkish Central bank Governor Sahap Kavcioglu indicated that core inflation, rather than headline, could gain importance as the CBRT sets monetary policy. He also evaluated current policy rate (19%) as being tight enough to bring inflation lower in the fourth quarter. Until recently, the CBTR governor indicated that the bank intended to keep the policy rate above the inflation rate. August CPI data published on Friday printed at 19.25% Y/Y for headline CPI, but core CPI eased from 17.25% to 16.76%. Comments today suggest that the CBRT might be inclined to give in to pressure from the government to reduce the policy rate in the near future to support economic growth. The next policy decision takes place September 23. The lira, which held up rather well after the CPI data, today dropped more than 1% on the risk of losing (real) interest rate support. EUR/TRY returns north of the psychological barrier of 10.