Team temporary suffered another setback today. US CPI unexpectedly accelerated to 5.4% y/y (0.4% m/m) after two months of a slight deceleration. The September reading equals the previous post-pandemic peak in June and is the fastest pace since August 2008. Energy again supported prices, sprinting higher at a rate of 1.3% m/m (24.8% y/y!). Utility gas service prices surged 2.7% m/m. Food prices increased 0.9% m/m. But even without these volatile categories, core inflation remained at an elevated 4% y/y – as expected. This is due to a sharp price rise of new vehicles (1.3% m/m) and shelter (0.4% m/m). The latter is an important observation as the cost of housing is a sticky-price item and accounts for almost a third in the CPI basket. Short-term US yields extended their intraday rise with 1 to 2 bps to 3.2/3.4 bps for the day (2y-3y) as markets further frontload a first rate hike by the Fed. At the current stage, a little less than 1 full rate hike (25 bps) is being discounted for September. Long US tenors erased earlier losses in the wake of the release but soon caved again. Yields trade 2.8 bps (10y) to 4 bps (30y) lower. After two days of marching higher without guidance of (Monday) or even in outright divergence with (yesterday) the US, German yields today retreat with substantial losses at the back of the curve. Changes vary from -0.8 bps (2y) over -4.8 bps (10y) to -7.8 bps (30y). European swap yields dive 10 bps (30y). In other bond news, the Flemish Community successfully sold €1.5bn under a new benchmark 10y bond. Pricing was set at OLO+17 bps vs initial guidance of +20 bps area. Books amounted to more than 5.9bn euro. Peripheral spreads vs Germany widen a few basis points, with Greece (+3 bps) underperforming even as overall (equity) sentiment is not too bad. European stocks rise about ¾ of a percent. Despite the significant UST underperformance across the curve, EUR/USD is holding up pretty well in a sign the dollar bull rally might be losing momentum. EUR/USD’s kneejerk CPI move lower soon reversed with the pair hovering back to intraday highs of around 1.156. USD/JPY even trades a tad lower for the day at 113.48.
UK yields do not escape the core bond surge with the long end of the curve falling off a cliff (-13.4 bps in the 30y). Other changes range from -3.2 bps (2y) to -9.1 bps (10y). Luckily for the pound, however, European yields face a similar faith. EUR/GBP remains within proximity of the 0.847 intermediate support area. Cable (GBP/USD) flipflops around 1.36 – no change here compared to previous days either. The EU is due to unveil a proposal with tweaks to the current Northern Ireland protocol today but there’s no news yet on how it is received by the British side.
Germany’s four economic institutes (DIW, Ifo, RWI and IWH) are expected to slash this year’s economic growth forecast from 3.7% to 2.4% later this week. The main argument is the drag from persisting supply bottlenecks. The IMF yesterday sounded more upbeat at 3.1%. Sources close to the deliberations also suggest that the joint statement from the institutes will show an increase (from 3.9% to 4.8%) for the 2022 GDP forecast while projecting 1.9% growth in 2023.
Czech National Bank board member Benda and board advisor Mateju argue in an opinion piece in the Pravo newspaper that relatively swift interest rate hikes are necessary to curb inflation, make the koruna stronger and help cool the country’s overheated property market. CNB governor Rusnok in a presentation also argued to focus on suppressing second-round inflation pressures by acting in a forward-looking fashion. He also mentions that the CNB will allow monetary tightening to spread both in the interest rate AND the exchange rate component. The Czech koruna profits from the hawkish policy and currency comments with EUR/CZK declining from 25.40 to 25.35. Key support stands at 25.25.