Markets
There was not a lot of room for overthinking yesterday’s Fed policy decision today. A slew of other central bank meetings (Turkey, Norway, Switzerland, and Bank of England) and the European PMI indicators were scheduled for today. Some of the former are discussed in headlines below and latter here. Regarding the PMI’s, it became clear that economic momentum is slowing in Europe as it is headed for the final quarter of this year. The September headline index fell from 59 to 56.3 for services and from 61.4 to 58.7 in manufacturing. Both services and manufacturing output growth slowed substantially amid raw material shortages, supply constraints and/or poor freight availability. This also affects demand (growth) in general, as do still sharply increasing prices that make some projects economically no longer viable. Markit described it as an “unwelcome combination of sharply slower economic growth and steeply rising prices”. That said, given the still very high levels of the indicators there is no need for worry right now. Markets agreed. European yields pared some of the opening gains in the wake of the report but reversed course later in the session. The German curve steepens with the belly of the curve (3.9-4.6 bps in 5y-10y) underperforming the wings (+1.7 bps 2y, +3.3 bps 30y). US yields show a more textbook-like trading pattern today. The curve bear steepens with yields higher 1 bp (2y) to 6.3 bps (10y) with the 10y yield nearing key resistance at 1.37%. This neatly fits yesterday’s Fed announcement that it will soon start tapering (affecting the long end) and in any case well in advance of any rate hike (dot plot suggest one in 2022 at the earliest). It also makes sense that it’s real yields doing most of the job, also in Europe. Yields rise on both sides of the Atlantic but for EUR/USD it’s the equity sentiment doing the trick. Stocks again inch a little less than 1% higher in a constructive setting and that’s supporting EUR/USD back towards 1.173 after testing the 1.1694 zone post-Fed. USD/JPY is a balance of weakness that for now is tilting in favour of the dollar (>110). DXY fell from the 93.43 resistance to 93.15 currently.
Also in the UK, PMIs dropped further and more than expected from 55 to 54.6 (services) and 60.3 to 56.3 (manufacturing). Sterling couldn’t care less, eying a more hawkish Bank of England. In its meeting today, the BoE chose not to put too much emphasis on slowing growth but instead focus on rising inflation. With the recent developments in the energy market, the BoE sees its case for some tightening strengthened. Markets brought forward their rate hike expectations with now one hike (more than) fully priced for May 2022. Together with the bright sentiment, EUR/GBP slipped from 0.8585 to 0.855 currently. Cable jumps back above 1.37.
News Headlines
The Norges Bank took a first step on the path of policy normalisation, raising its policy rate from 0% to 0.25%. A normalising economy doesn’t require the current degree of accommodation. Countering the build-up of financial imbalances also suggests higher interest rates, the NB says. Activity in Norway returned above its pre-corona level, the unemployment rate has fallen further and capacity utilization is close to normal. Underlying inflation is low but increased activity and rising wage growth will help push inflation up towards the 2% target. The NB pencils in a next rate hike in December. The bank sees the policy rate at 1.7% in 2024, with the rate path slightly higher than in June. The Norwegian krone gained modestly to trade near EUR/NOK 10.08.
The Central Bank of Turkey (CBRT) went in the opposite direction and cut its policy rate from 19.0% to 18.0%. The move was a surprise even as CBRT governor Kavcioglu recently struck a more dovish tone, referring the lower core inflation (16.76% in August) as a reference for policy rather than the headline figure (19.25%). The CBTR assesses current high inflation temporary. At the same time, monetary tightening is said to have a decelerating impact on domestic demand. This negative impact of high yields on growth already for long causes president Erdogan to push the CBTR to cut interest rates. The CBTR moving away from its previous commitment to keep a positive real policy rate hammered the lira. EUR/TRY rises more than 1.5% to the 10.30 area.
