Markets
You know something’s wrong when stocks and bonds sell off in lockstep. The simple answer is fear that structurally higher inflation risks weighing on growth -” both via consumption and eventually via investments -” with central banks eventually obliged to tighten the screws on monetary policy despite the nature of the (supply-side) inflation shock. End result: stagflation. Add a little bit of nervousness on the US debt ceiling debate (US Treasury secretary Yellen warns for October 18 default deadline) and US stock markets end the day 1.6% (Dow) to 2.8% (Nasdaq) lower. Main European indices similarly lost around 2.5%. Technical pictures show more and more cracks in the ruling buy-the-dip pattern with the rest of the week serving as a real test. The US yield curve bear steepened with yields rising by 2.4 bps (2-yr) to 9.2 bps (30-yr). Details showed both real rates (Fed action expected) and inflation expectations adding to the moves. The US 10-yr yield closed above 1.53% retracement (62% retracement on March/July decline) with the US 30-yr yield breaking out of the 1.8%-2.05% trading range in place since July. A very weak US consumer confidence coincided with intraday lows on core bonds markets. The US Treasury ended its end-of-month refinancing operation with a disappointing $62bn 7-yr Note sale. The auction bid cover was near recent average, but the auction stopped almost a full bp above the 1:00 PM bid side. German yields added 0.1 bp (2-yr) to 2.3 bps (10-yr) in a daily perspective. The rise in European yields remains solely contributable to higher inflation expectations with several market gauges approaching 2% for the first time in many years. The ECB for its part keeps denying the inconvenient truth, but the day of reckoning will come sooner or later. ECB hot shots de Guindos and Lane are scheduled to speak at the ECB forum today and serve as a wildcard for trading. After European close, the forum features a panel discussion with G4 central bank chairman. Overall, the same trading dynamics as earlier this week will remain at play. Asian bourses don’t escape the gauntlet this morning. Eco data are confined to EC economic confidence data.
The dollar’s performance against the euro was telling. EUR/USD closed at 1.1683 from an 1.1695 open without really testing the YTD low at EUR/USD 1.1664 despite very fertile USD trading conditions ((real) rate divergence, risk aversion). The jury is still out, but it tentatively supports our case that sufficient USD positive news is discounted with investors knowing that the euro’s moment of clarity will come once the ECB embraces the global normalization swing. The real rate argument primed in USD/JPY which tested the post-Covid high at 111.66. Sterling suffered the same fate as the less liquid, smaller, currencies with EUR/GBP (0.8631) closing at the highest level since mid-July.
News headlines
According to a draft budget, the Polish government aims to reduce the 2022 budget deficit to 2.9% of GDP as solid economic growth and improved tax collection are expected to improve public finances. The budget forecasts assume economic growth of 4.6% in 2022 compared to 4.9% expected this year. The public debt, as measured according to the EU general government debt methodology, is expected at 56.6% of GDP in 2022 and is seen decreasing further 52.9% by end 2025. Yesterday, rating agency Standard and Poor’s slightly downwardly revised its forecast for Polish Growth next year from 5.4% to 5.3%. According to S&P private consumption supported by a strong labour market and loose fiscal policy will continue to support economic growth. On the FX markets, the Polish zloty yesterday was an important victim of the higher core yields and the risk-off sentiment. EUR/PLN jumped from sfrating agency Standard and Poor’s slightly downwardly revised its forecast for Polish Growth next year from 5.4% to 5.3% 4.ub 4.60 to the 4.63 area.
US September consumer confidence (conference Board) as published yesterday declined to the lowest level since February (109.3 from 115.2). The decline was both due the assessment of current conditions (143.4 from 148.9) and the expectations component (86.6 from 92.8). Consensus estimates were for a near stabilization. The decline was rather broad-based across different subcategory measures by the survey. Amongst others, also the labour market balance (jobs Plentiful-jobs hard to get) eased from 44.4 to 42.5.
