Thu, Sep 29, 2022 @ 08:52 GMT
HomeContributorsFundamental AnalysisRecession Pricing Drives Deeper Curve Inversion

Recession Pricing Drives Deeper Curve Inversion

Market movers today

The US releases consumer confidence from University of Michigan for September. It has rebounded a bit in recent months from low levels. Focus will also be on the inflation expectations index on 5-10 year horizon, which reached 3.1% a couple of months ago but has since fallen back to 2.9%. It still suggests inflation expectations are anchored.

In the euro area we get final CPI for August, which provides more details on sub-components. It will likely confirm that a peak in underlying inflation pressures is not yet in sight.

UK releases Retail Sales.

The 60 second overview

Markets: After taking a breather on Wednesday, risk markets returned to a negative mode on Thursday. The S&P500 index fell to three-month lows with tech and growth-related stocks underperforming and the rise in short-dated yields deepened the curve inversion. In the euro area, the EUR 2y30y spread is trading at 46bp, levels similar to June 2008 just three months before the Lehman crash.

Fed preview: In our Research US: Fed preview – Fast pace hiking cycle continues, 16 September, we repeat our call for a 75bp hike by the Fed next week. The market is more upbeat and sees a possibility of a 100bp hike. In our view, recent inflation data does not warrant such a large hike, and the fact that real yields are rising and financial conditions have tightened, implies Fed’s hawkish post-Jackson Hole communication is working as intended. While we keep our call of the third consecutive 75bp hike next week, we also find a chance of a fourth 75bp hike in November, and potentially a fifth 75bp hike in December, and a terminal rate well above 4% next year likely. We currently forecast a total of 125bp of hikes for rest of the year but we plan to review our forecast after next week’s FOMC meeting.

Russia-China relations: Presidents Vladimir Putin and Xi Jinping met in Uzbekistan yesterday, the first in-person meeting for the two after Russia launched its attack on Ukraine in February. In a sign that the war is creating some fractions in the friendship between the two nations, Putin acknowledged China’s ‘concerns’ about the war in Ukraine. China continues to provide diplomatic support for Russia but the post-meeting comments alleviated concerns that China would step up its support and potentially face US sanctions as a result. While fostering closer economic and strategic ties with Russia, China seems determined to withhold material support to Russia and opposes any escalation that might further destabilize the world economy.

Equities generally lower for another day, as growth cyclicals continue to weigh on indices. Inflation (and not recession) continues to be the main theme for markets. Yield sensitive sectors such as tech or real estate continue to underperform while banks and health care beats. With banks outperforming it is clear that investors are still believing in a muddling-through scenario in terms of growth. Interestingly, mainly large cap growth (FANMAG) is selling off, while small caps are faring better. S&P500 -1.1%, Nasdaq -1.4%, Dow -0.6% and Russell 2000 -0.7%. Risk-off mode continuing into this session according to US futures and Asian markets. The digesting of the US CPI print is the best explanation for the market narrative, while macro data yesterday was overall supporting both camps.

FI: Market attention was all on the 75bp pass-through taking effect Wednesday as we got the first release of the €STR fixing (which showed a full transmission as €STR rose 74.5bp), while the repo market is yet to show full transmission, and speculation arise if that may even come. GC repo rates still need to show another 10-20bp of pick-up for a full transmission. The suspension of the government deposit cap of 0% did not seem to have alleviated the concerns of pass-through.

FX: Cyclically sensitive currencies continue to trade on the back-foot while the USD has been a clear recent winner. That said, the EUR has kept up well in recent sessions with EUR/USD still hovering around parity. EUR/NOK has approached 10.20 while EUR/SEK is back above 10.70. GBP has also traded poorly as of late with EUR/GBP back above the 0.87 mark.

Credit: Investment grade credit markets were in a wait-n-see mode on Thursday and Itrax main widened just slightly (0.9bp) to close at 107.6bp. The high yield market, as measured by Itrax Xover, was somewhat more volatile and widened 7.2bp to close at 531.6bp.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Featured Analysis

Learn Forex Trading