Thu, Dec 01, 2022 @ 13:53 GMT
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US Yields Marching Higher

Market movers today

German industrial production for July will give further clues whether recession is approaching in Q3. Factory orders have fallen in recent months, but a notable order backlog may cushion the decline in production.

We expect the Polish central bank to raise rates by 25bp in line with consensus, but with the risk of 50bp rate hike, as Polish inflation surprised on the upside in August, printing at 16% compared with a year earlier.

Bank of Canada will likely hike its policy rate by another 75bp, downshifting from July’s surprising 100bp move, after economic activity has been moderating (especially in rate-sensitive housing), but inflation remains too high for comfort.

In Sweden, a triplet of July growth indicators released with the PVI, consumption and GDP indicator. The Debt Office also releases the August borrowing requirement.

The 60 second overview

EU scrambling to meet energy challenges: EU energy ministers will meet for an emergency meeting tomorrow to discuss further how to meet current energy headwinds. Price caps, windfall profit taxes and emergency credit lines for energy participants are set to be discussed. Gas prices continue to fluctuate widely within the day but ended slightly lower yesterday and are still 30% off the recent peak seen two weeks ago.

Higher yields, lower equities and oil prices: A further rise in US 10-year bond yields of 15bp yesterday added to headwinds and recession fears roiling markets. US equities dropped 0.5% yesterday and futures are down a further 0.5% in Asian trading. Oil prices are close to USD 91 per barrel hitting the lowest level since February this year.

US service data a mixed bag: US ISM service surprised again to the upside rising to 56.9 in July from 56.7 painting a robust picture of the sector. On the other hand, service PMI from Markit was revised lower for July to 43.7 from 44.1 showing a much weaker state of services. Markets tend to focus more on the ISM data and the upward surprise here helped underpin a rise in bond yields. We need to see more months of data to get a clearer picture of where services are heading US but we expect the Fed will keep tightening policy until there is a clear picture the economy is weakening and the labour market softening in order to conclude that underlying inflation pressures are coming down towards their 2% target.

Weak Chinese trade data: Chinese exports dropped to 7.1% y/y in August (consensus 13.0% y/y, previous 18.0% y/y) highlighting that China’s export engine is weakening on the back of growth headwinds in US and Europe. Imports also dropped to a weak 0.3% y/y (consensus 1.1% y/y, previous 2.3% y/y) highlighting the weakness of China’s domestic economy as well. We expect Chinese growth to remain under pressure rest of the year and mainly supported by stimulus measures such as infrastructure investments.

Equities: Global equities down for the eighth day in a row, with MSCI world down almost 10% since the peak less than a month ago. Multiple factors behind the moves with weaker macro momentum, higher yields, escalating energy crisis in Europe and new Covid lockdowns in China. It would be straight forward to blame the move higher in yields for the equity sell-off yesterday. However, we only saw a slight value outperformance and the moves are equally driven by increased recession fear.

Please note how the oil and equity correlation has sifted back to positive lately and the all-dominating fear of stagflation is shifting further towards the fear of too heavy demand and hence recession becoming the dominating fear. VIX ticked higher again yesterday, ending the day close to 27.

In US yesterday, Dow -0.6%, S&P 500 -0.4%, Nasdaq -0.7% and Russell 2000 -1.0%. The negative sentiment continues in Asia this morning with broad-based declines. US futures are down in the ballpark of 0.5% while European futures are down more than 1% this morning.

FI: It was again a very volatile day in the global financial markets on the back of a stronger than expected US ISM service index. Hence, there was a big jump in US Treasury yields yesterday afternoon and solid spill-over effect to the European bond markets. UK government bond yields also rose significantly given the expected fiscal easing by the new UK Prime Minister, Truss. Hence, the markets are once again pricing in more rate hikes by the global central banks despite the rising risk of recession in especially UK and Europe.

FX: EUR/USD retraced lower again yesterday and in overnight trading to below 0.99. Although we still widely consider GBP a range play for the coming months, we see some upside in the near term with the outlook of substantial fiscal easing.

Credit: Credit markets saw significant primary activity on Tuesday as companies rushed to secure new funding ahead of the Fed meeting later this month. In the Scandi space the most prominent issuer was Orsted that issued EUR900m and GBP950m in total. The 9Y fixed EUR tranche was priced at MS+85bp after initial price talks of MS+110bp. Overall the issuance saw high interest and hence was able to tighten the price level.

Overall on market level iTraxx Main was 3bp tighter while Xover was 15bp wider at 571bp.

Nordic macro

A trio of July growth indicators are due for release in Sweden. Firstly, the PVI appears likely to have dropped on a monthly basis, as Manufacturing PMI suggests falling orders and slowing production. The same is true in principle for services and construction production, both part of the PVI. Secondly, the consumption indicator is also likely to have dropped on the back of declining vehicle and retail sales, although the number could have been bolstered by leisure consumption remaining strong. Thirdly, adding an already announced decline in hours worked suggests the July GDP indicator may also give a negative m/m print.

The Swedish National Debt Office is also due to release the August borrowing requirement. The SNDO forecasts a SEK28.7bn surplus. Last month’s figure came in around SEK15bn better than expected, primarily due to larger deposits from Svenska Kraftnät (the electricity grid authority) but also due to higher tax revenues. This pattern may well be repeated in August given the high electricity prices and inflation.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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