Markets
The curve flattening/correction in LT core bond yields that started in the US earlier this week continued. Since yesterday the move also spilled over to European bond markets. This catching up move was extended with force today. The repositioning still occurs mostly independent of eco data. Yesterday’s US inflation data maybe supported the trend, but nothing more than that. Investors apparently embrace a scenario that central bankers (especially the Fed and the BoE) might try reining in inflation by taking action sooner and in a more decisive way than expected until now. If successful, this might avoid the need for a more long-drawn hiking cycle further out. If successful! The combination of ongoing high inflation expectations and a setback in real yields suggests that CB’s ability to act might be complicated by lower growth further down the road. It will take time for bond markets to sort out this complex matrix. US yields apparently found a new short-term equilibrium. Yields changes are less than 2 bp across the curve. At 1.53%, the uptrend in the US 10-y yield shows cracks but isn’t really broken yet. A beak below 1.45% would suggest a more profound change in sentiment. We’re not that far yet. Regarding today’s eco data, US jobless claims declined below the 300k barrier for the first time post corona (293k). US (core) PPI was softer than expected. EMU yields continued their catching up move with German yields declining between 0.7 bp (2 bp) and 5.1 bp (10-y). The correction is still modest given the protracted rise since mid-August. The uptrend in the 10-y EMU swap still remains intact (see graph 2 infra). Today, comments from several ECB members including Knot, Lagarde and Rehn only illustrated the division within the MPC on the ‘temporary inflation narrative’. The decline in yields still has the power to revive equity sentiment. European equities are gaining 1.0%/1.5%. US indices also opened about 1.0% higher. The oil price holding near recent peak levels (brent $84/b) at this stage is no obstacle.
In FX, the dollar correction continued this morning with EUR/USD trying to regain the 1.16 barrier. However, the US currency regained momentum as US traders rejoined the action. EUR/USD currently trades little changed in the 1.1595 area. DXY hovers just below 94.00. Despite lower LT yields, the yen this time weakened on the global positive risk sentiment with USD/JPY (113.63) again trading near recent top levels. Divergence between the yen and the Swiss franc remains striking. EUR/CHF dropped below the 1.07 handle. The better sentiment also supports sterling despite a (corrective) decline in UK yields. EUR/USD (0.8465) is trading within reach of the 0.8450 support.
News Headlines
Swedish inflation accelerated in September, but not as fast as feared. Headline inflation increased by 0.5% M/M to 2.5% Y/Y (from 2.1% Y/Y). Market consensus stood at 0.6% M/M and 2.7% Y/Y. The underlying CPIF gauge – the Riksbank’s preferred measure – rose by 0.5% M/M to 2.8% Y/Y. It’s the highest Swedish inflation reading since the end of 2008! Yesterday’s Prospera survey of money market players already showed higher inflation expectations for the following years with most respondents expecting a first rate hike in 12-24 months’ time. Accelerating inflation (expectations), even though less than expected, nevertheless managed to put the Swedish koruna on fire. EUR/SEK dived from 10.13 to test key 10 support today. That’s the downside of the narrow 10-10.30 trading channel that guided trading since end last year. A break lower paves the way to 9.80 which is 50% retracement on the 2012-2020 EUR/SEK increase. The Swedish Riksbank holds its final policy meeting of this year at November 25.
ECB Governing Council member Knot said that risks for headline inflation are again tilted to the upside. They are mainly linked to more persistent supply side bottlenecks and stronger domestic wage-price dynamics. He thinks that it’s “good news” that investors take the possibility of a period of higher inflation seriously. The European 10y inflation swap tested the psychologic 2% barrier earlier this month. The ECB’s current baseline scenario is consistent with ending PEPP in March 2022. He added that it would not be proportional to use asset purchase to actively strive for an inflation overshoot.
