Stocks caught a better bid in Europe and the US yesterday compared to Friday and despite a weak Asian start of the week. But with some key data scheduled for release, including US CPI today, markets refrained from taking large positions. European equities inched about half a percent higher while the Dow on WS scored 0.8%. Commodities fared well: the CRB basket of commodities (finished at 221.20) could practically taste the previous cycle high of end-July at 221.21. Despite rising commodity/energy prices -” which by the way are really becoming an issue in Europe -” core bond yields barely budged in Germany. The yield curve finished flat though that conceals the ongoing divergence between real yields (down, new record low) and inflation expectations (up). US yields even fell, with the curve bull flattening up to 3 bps at the long end. EUR/USD struggled for a while, probably following the underlying European yield dynamics, even as risk appetite was strong. Both absolute yield differences and sentiment in the end prevented the pair from closing below 1.18. The likes of the AUD and CAD benefited from the commodity/oil prices as did the NOK, which was unhindered by election day (see below). EUR/GBP couldn’t be more of a EUR/USD copycat. The combo erased initial weakness to close unchanged around 0.853.
Asian sentiment is mixed this morning. South Korean stocks outperform (+1.2%). In China/HK, the Evergrande sage is weighing on the mood (-0.5%). The world’s most indebted developer hired advisers to find a solution for its cash crunch. The Aussie is the laggard on FX markets following comments from RBA governor Lowe. He pushed back against rate hikes being priced in before 2024. AUD/USD eases to 0.734. EUR/USD ekes out a small gain to 1.1815. Core bonds trade marginally lower.
US August CPI is expected at 5.3% y/y today. That would be the fourth month of 5%+ inflation. Analysts see core inflation coming in at 4.2% y/y. Risks stay tilted to the upside as reports of shortages are still omnipresent. Energy inflation may have eased a bit following two strong months. However, with the red-hot housing market we’re closely watching new drivers for CPI (eg. shelter). With the Fed meeting looming (Sept 22), markets will notice a strong reading. In US yields, 1.37% is still the topside reference. The dollar is looking at first resistance at EUR/USD 1.1752/56 or 93.19 for the DXY. Sterling just received part one of its economic update with a near-consensus labour report. EUR/GBP is holding steady around 0.854. Tomorrow’s UK CPI numbers have more market moving potential.
Results after yesterday’s Norway parliamentary elections show that central left opposition is on course to gain a majority in parliament. Outgoing Conservative Prime Minister Solberg conceded the election. The Labour Party leader Jonas Gahr Store might take the lead to form a new government. However, within the spectre of left-wing parties, substantial differences persist on key policy topics ranging from the role the oil industry in the Norwegian economy as the country prepares for a transition to more renewable energy. Also the relationship with the EU is a subject of debate as some smaller parties question the place of Norway in the European Economic Area, where the country has little impact on the rules it has to accept. The Norwegian krone yesterday was well bid with EUR/NOK temporarily declining below EUR/NOK 10.20, but this was probably mainly driven by higher commodity/oil prices.
In a Monthly survey of the NY Fed published yesterday, inflation expectations among consumers for the next year as well coming three years rose to the highest level in 2013, which was the start of the survey. Expectations for the year ahead rose for the 10th month straight to 5.2% in August. The median expectation for the rise in inflation over the next three years rose to 4.0%. Food prices are expected to rise 7.9% over the next year (from 7.1%). Rent is expected to increase by 10% over the next 12 months. Medical care prices are expected to increase 9.7% over a 10-month horizon. Expectations for the rise in house prices for next year eased to 5.9%.