Markets
Back in August, markets aligned with the Bank of England’s new forward guidance which called for some modest tightening over the policy horizon in order for inflation to return to the 2% inflation target. Sterling futures discounted a 25 bps rate hike/year path over the next three years. Unexpectedly accelerating UK inflation and some hawkish BoE comments later, short term UK money markets discount 100 bps rate hikes over a 12 month horizon. The latest hawkish repositioning occurred after Bank of England governor Bailey plain and simple stated that the BoE will have to act on inflation. Risks are now clearly tilted to a faster and more aggressive start to the tightening campaign. The November Monetary Policy Rate (Nov 4) marks an ideal opportunity for a >=15 bps rate hike. The UK gilt curve bear flattens today with yield changes ranging between +15 bps (2-yr) to -0.3 bps (30-yr). The UK 2-yr yield rises to 0.75%, the highest level since mid-2019 and compared with 0.05% ahead of the August BoE change in forward guidance. Sterling remarkably failed to profit from this huge kind of (short term) interest rate support. The lack of enthusiasm especially counts for EUR/GBP which closed last week below the bottom of the longstanding sideways trading range between 0.8450 and 0.8421. EUR/GBP at the time of writing even tries to recapture this level. GBP/USD changes hands at 1.3725, down from an 1.3756 open.
German Bunds and US Treasuries followed the Gilt sell-off. US yields added up to 4.2 bps with the belly of the curve underperforming the wings. German yields add 2.5 bps to 8.1 bps on the 2-10yr segment (belly underperforming) with an outperformance of the very long end of the curve (30-yr: -2.9 bps). The sell-off also translates in more aggressive Fed and ECB rate hike bets. Markets nearly discount 50 bps rate hikes in 2022 by the US central bank and a 10 bps move by the ECB by September next year. 10-yr yield spreads vs Germany widen by 2-3 bps for the likes of Greece, Portugal, Italy and Spain. Apart from the rise in core yields, this morning’s FT article might play a role as well. It suggested a shift from national to EU debt after PEPP ends. Hawkish repositioning in all jurisdictions kept the balance on FX markets stable. EUR/USD currently changes hands just above 1.16. Stocks lose up to 1% in Europe while US indices opened with smaller losses.
News Headlines
OPEC+ again pumped less oil than what was planned for in September. It is still withholding several hundreds of thousands barrels a day to support oil prices in the wake of the pandemic. It promised to raise output with 400 000 barrels/day every month from July onwards to at least November. But since that pledge, OPEC has delivered 9% less than scheduled in July, 16% in August and another 15% in September, Bloomberg reported, citing delegates with knowledge of the matter. According to the financial news agency, OPEC could have pumped an extra 747 000 barrels a day in September and still remain with the agreed production limit. Part of the explanation is that some members, including Angola, Nigeria and Azerbaijan were unable to raise output due to a lack of investment and exploration. It does draw criticism however, with oil prices showing little signs of easing. Brent oil today adds 0.6% and is on track to close above $85 for the first time in 2 years.
A tight US job market triggers strikes for more pay, Reuters reported today, running the story after a last-minute deal over the weekend prevented 60 000 behind-the-scene workers on movies and TV shows to go on a largescale strike. In general, Reuters says union leaders are feeling more comfortable to go on the streets and demand a better deal, after speaking to several of them. According to Cornell University’s Labor Action Tracker, already 254 strikes were launched this year so far. Support among Americans for unions has risen strongly, too, with a poll in August showing 68% approving them – the highest proportion since 1965. JOLTS data in August revealed a new record 2.9% of voluntary job quitters, in another sign of growing employee confidence.
