Markets
Markets entered calmer waters after the sharp bond sell-off and subsequent risk-off repositioning on global equity markets. Still, uncertainty remains elevated as investors have to cope with multiple, often conflicting signals. Energy commodities including natural gas and oil (brent $78 p/b) are off yesterday’s peak levels, but remain a source of rising inflation and risk becoming an obstacle to future growth rather than being a sign of healthy demand. Central banks also struggle how to cope with this unusual complex. China (financial stability, energy supply issues with potential negative spill-overs on growth) remains a source of uncertainty, too. This also applies to the political bickering on the US debt ceiling/budgetary policy. US (2-y -0.7b; 30-y -3.5 bp) and Germany yields (-0.5bp, 30-y -2.5 bp) try a tentative (re)flattening move. However, it’s too early to call it a correction after recent sharp rise. Uptrends/ improved technical pictures for the US (1.50%) and German 10-y (-0.22%) yield remain intact. Upcoming inflation data (Germany tomorrow, EMU CPI and US PCE deflators on Friday) are next important data reference to guide interest rate markets. Today, EMU EC economic confidence (117.8 from 117.6) printed solid/stronger than expected as sentiment improved among consumers, in manufacturing and construction. Sentiment in retail and services eased. The report suggests that the EMU recovery stays well on track, but had no lasting impact on trading. Intra-EMU spreads were only modestly affected by recent global repositioning. The Italian 10-y spread reversed most of yesterday’s widening (-3 bp). European equites regained 1.0% + around noon, but sentiment is again dwindling as US traders join. US indices struggle to stay in green. The technical graphs still look heavy.
The pause in the bond/equity sell-off didn’t alter the constructive dynamics of the US dollar. The Trade-weighted index (94.00) cleared the 93.73 top/resistance. EUR/USD dropped below the 1.1664 support, opening the way for a retest of the 1.1612/03 area (Sept/Nov 2020 lows). The yen failed to hold modest early gains even as risk sentiment stays fragile. At USD/JPY 111.55, recent top remains within reach. Sterling stays in the doldrums losing against a strong dollar (cable 1.3450), but also against an otherwise bleak euro (EUR/GBP 0.8650). Today’s price action suggests that yesterday’s sterling setback was not only due to the global risk-off but that some broader distrust on the UK economic performance might also be in play.
News Headlines
Fumio Kishida did win the leadership contest of Japan’s ruling Libaral Democratic Party. Kishida, a former foreign Minister, is seen as a consensus builder. As leader of the LDP, he will become next Prime Minister, probably as early as begin October. General elections in Japan are expected to take place in the first half of November. Kishida is seen as supporting a policy of persistent fiscal stimulus. In this respect, he advocates a new spending package of ‘tens of trillions of JPY’ and approves current stimulative monetary policy of the Bank of Japan. He also gives more weight to wealth distribution and in this respect might take a ‘less neo-liberal’ approach than was the case under ‘Abenomics’. The yen hardly reacted to the announcement of Kishida’s victory.
Headline CPI in Belgium as published by Statbel declined 0.25% M/M, but the Y/Y figure rose further from 2.73% in August to 2.86% this month. Yearly prices rises reached the highest level since February 2017. Core inflation, which excludes energy products and unprocessed food, slowed slightly from 1.65% to 1.61% Y/Y. Inflation on Food and non-alcoholic beverages declined for the eight consecutive month and prints at -0.99%. On the other hand, inflation for energy produces stands at 19.37%. The most significant price increases in September were recorded for alcoholic beverages, motor fuels, domestic heating oil, private rent and maintenance and repair of personal transport equipment. Hotel rooms, bread and cereals, confectionery, package holidays in Belgium, non-alcoholic beverages, dairy products and meat had a decreasing effect on the index.
