Market movers today
- Tuesday is a slow day on data front. Consensus expects a modest decrease in US building permits and stagnated growth in housing starts, a potential reflection of rising input costs and labour shortages in the construction sector.
- The central bank of Hungary will announce their rate decision at 14:00 CET. We expect another 15bp hike to 1.8%, in line with the consensus and what the central bank has communicated earlier this month.
- Overnight, September trade data from Japan is likely to show a sharp slowdown in both exports and imports. Considering if, when, and how the stagflation story unfolds, this piece of data could give us some indication of the faltering global demand.
- Also overnight, we get loan prime rates and home price data from China. We expect unchanged loan rates in line with consensus. September house prices will be more interesting as they could well lose momentum as a result from weak home sales in September and developers cutting prices in an effort to raise cash by clearing unsold inventories.
The 60 second overview
Asin sentiment rebounds: Despite the weaker-than-expected Chinese GDP figures yesterday morning, risk sentiment recovered in Asia overnight following the US, and broad USD weakened. One of the large indebted Chinese property developers, Sunac China, was able to make a coupon payment to its bondholders overnight, following recent PBOC comments stating that the Evergrande crisis will be manageable. Nevertheless, we continue to expect further downside risks for Chinese growth going forward, especially given the recent rise in energy prices. Read more about our view and implications for metal markets in Research Global – Power crunch supports metal prices despite fading demand, 18 October.
RBA Minutes: The Reserve Bank of Australia has been among the central banks where market pricing has diverged to a clearly more hawkish path compared to the official forward guidance. In its October minutes released overnight, RBA dovishly stated that while wage pressures were emerging in certain parts of the world, this was not the case in Australia. It continues to signal no rate hikes until 2024, even though market prices in the first hike already by H2 2022. AUD FX was also little affected by the minutes, heading higher overnight. We continue to see market pricing as too aggressive, and expect to see lower AUD/USD also on the back of Chinese-driven weakness in key Australian export commodity prices and broad USD strength.
US Macro: US industrial production fell short of expectations in September, dropping 1.3% m/m (from +0.4%) compared to expected growth of 0.2%. Global supply challenges continue to weigh on output, as shortages of semiconductors caused motor vehicle output to fall by 7.2% m/m. While temporary disruptions related to hurricane Ida also affected the weaker output, the supply shortages are likely to continue to weigh on industrial production, which currently stands 1.1% below pre-covid level.
Equities: The week kicked off on a mixed note. US finished mostly higher but Europe mostly lower, following some morning weakness. Growth was the dominating factor which also helps to explain the regional performance. Sectors such as tech, consumer discretionary and communication services were in the top, utilities and health care in the bottom. S&P 500 closed up 0.3%, Nasdaq 0.8%, Russell 0.1% but Dow -0.1%. Asian markets are following this morning but US futures have dipped into negative.
FI: Yesterday was all about BoE’s Bailey saying that they ‘have to act’ to stem inflationary pressures to avoid inflation expectations to become entrenched, which drove euro rates as well. European markets seems to have ‘stopped out’ on the transitory narrative as the central banking sensitive segment of 3-5y point suffered significantly, and ended the day around 6bp higher. At the same time, the long end rallied markedly, leaving the 5s30s EUR swap 12bp flatter, so now stand 21bp lower than just one week ago. 5y5y EUR inflation swap rose 5bp to end at the highest levels since 2014 at 1.91%. The 1y inflation gaps, which is around 1.80-1.85% out to 10y show that markets are testing the narrative.
FX: While rates markets had a violent day moves among FX major-pairs were more muted. The EUR was generally the biggest outperformer, which contributed to lifting EUR/USD above the 1.16 mark. In the other end of the spectrum, ZAR, RUB and SEK underperformed returning EUR/SEK above 10.05. Despite the sharp rise in GBP rates EUR/GBP still edged higher. EUR/NOK ended the session roughly unchanged.
Credit: Cash bonds continued to outperform CDS indices yesterday. Xover widened 2bp and Main 0.4bp. HY bonds, on the other hand, tightened 4bp and IG bonds tightened almost 1bp.
