Interest rate markets show quite a divergent pattern. US markets reopened after enjoying a long weekend. Yesterday’s bearish price action in Europa, notably in a risk-off market, made clear that markets are more than ever embracing the idea of CB font-loading to bring inflation (expectations) back under control. Friday’s post-payroll/pre-long weekend short covering on US Treasuries didn’t fit in this narrative. US yields rebound sharply with yields at the belly of the curve gaining 12 bps (5/10-y), the wings rising 9/10 bps. The ISM services (56.9) confirms recent evidence that there is no reason for the Fed to ease its anti-inflation campaign. European interest rates took a breather after yesterday’s remarkable rise. Indeed, there were headlines from dovish ECB members (Centeno and Stournaras) advocating a gradual approach. Even ECB’s Kazaks gave some more balanced comments on the pace of tightening in a context of a protracted recession. However, we don’t think this applies to this week’s meeting. After easing temporarily, EMU swap yields currently are trading little changed (2-y) to still marginally higher (5-y +2.5 bps). Oil and the European gas benchmark contracting again, ceding ground despite the closure of Nord stream 1 and yesterday’s OPEC production cut, maybe created some breathing space too. Price action on UK interest rate markets is interesting too. The new UK government is said to prepare a package of up to £130 bln to mitigate consumers’ energy bill and at the same time might prepare measures worth up to £40 bln to ease the burden of higher energy costs for businesses. Quite an impressive fiscal stimulus in an environment where central bankers try to cool inflation via a moderation in global demand. With the 2-y gilt yield is easing 2 bps, markets are apparently cautious to expect a forceful recalibration of BoE policy. At the same time yields at longer maturities are jumping sharply (30-y + 18 bps!). Equities are ceding modest gains on the sharp intra-day rise in yields during the USD trading session.
The TW USD index (110.17) simply resumes its uptrend after Friday’s post-payrolls profit taking (cycle top stance at 110.27. The most remarkable performance today comes from the USD/JPY cross rate, jumping from 140.25 this morning to currently trade at 142.50, the strongest level since August 1998. At current pace, the 147.66 1998 peak can come within reach soon. EUR/USD also isn’t out of the woods yet. The pair (0.9895) struggles not to fall below yesterday’s multi-year low of 0.9878. Even so, a more neutral price action in the likes and EUR/AUD, EUR/NZD, EUR/CHF and to lesser extent EUR/CAD only confirms that this is at least as much USD strength as it is euro weakness. EUR/JPY even surpassed the 141mark. Sterling today was one of the few ‘majors’ able to compete with the almighty US dollar as the UK currency profited from the expected huge fiscal support of the PM Truss’ government to address the energy crisis. Cable is holding north of the 1.15 barrier (1.1536). EUR/GBP dropped from the 0.8625 area at the start of trading to currently trade near 0.8575.
Turkey plans a new round of cheap, government-backed loans for businesses, according to persons familiar with the matter. The plans to extend loans under the Credit Guarantee Fund were disclosed during a closed-door meeting held by Treasury and Finance minister Nebati. It’s the latest stimulus measure to keep the economy going as the country heads into next year’s elections. Last month, Turkey’s central bank unexpectedly cut rates in the face of a growth slowdown, even as inflation skyrocketed to more than 80% in August. The news comes after new economic forecasts over the weekend, projecting GDP growth for this year and the next to come in at 5%.
Italy came up with a new plan to reduce natural gas consumption through the winter in order to meet the EU target of 15%. In reality, the reduction will be less, totaling 7% as the country obtained an exemption based on its gas storage capacity. Measures to reach the target include capping indoor temperatures at 19 degrees Celsius and have heating hours reduced, increasing use of coal and shorten the traditional winter heating schedule by two weeks.