US data came in strong yesterday. The September ADP job report hit the bar (208k with a 53k upward revision for August). The US non-manufacturing ISM stabilized at a strong 56.7 (vs 56 expected), contrasting with the below-consensus outcome of Monday’s manufacturing gauge. The numbers came amid hawkish Fed speech from the likes of SF Fed Daly and Atlanta Fed Bostic. This helped sustain a rebound in core bond yields after a few days correcting lower, although most tenors (in the US) finished below their intraday highs. US yields rose between 5.6 and 12.3 bps with the belly of the curve underperforming. Bund yields added 12.2-16.3 bps across the curve. The 10y yield took out the 2% mark again. Italy significantly underperformed regional peers. The 10y yield soared 30 bps and spreads vs Germany’s 10y shot up 13 bps. It followed ECB data showing less support for BTP’s in August via its flexible PEPP reinvestments (as compared to July) and Moody’s surprise warning for a potential downgrade after the right-wing election victory. Higher rates pushed stocks in the defensive, declining 1% in Europe. US equities slumped up to 2.4% before staging a rebound that capped losses to just 0.2%. Energy companies rallied following a big 2m b/d OPEC+ production cut. Brent oil rose 1.7% to $93.4. The dollar appreciated, with the technical deities helping a hand. EUR/USD reversed course after hitting the top of the downward trend channel. The pair slipped from 0.998 to 0.988. Trade-weighted DXY bounced off 110 to 111.21. USD/JPY sticks south of 145. Sterling was sold. GBP/USD dropped from 1.15 to 1.132. EUR/GBP bottomed out further with gains to 0.873 and capturing lost support at 0.8721 again.
Asian news flow is thin this morning and that may not change today. The ECB meeting minutes usually don’t contain as much clues as those from the Fed do but it’s worth mentioning anyway. Other than that investors will simply count down to tomorrow’s official job report (payrolls) to check whether it chimes with their recent repositioning for a slightly softer Fed. Current market mood is cautiously optimistic. Asian equities put comfort from WS’s intraday reversal. South Korea outperforms (+3%). European stock market futures point to a higher opening to the tune of 1.5%. Core bonds inch higher but conviction is low. The dollar takes a breather after surging yesterday. EUR/USD recoups some losses to trade around 0.992. The British pound is not much affected by Fitch’s cut in the outlook of the UK (see below). EUR/GBP is currently running a three-day winning streak (0.874).
The National bank of Poland yesterday unexpectedly left its policy rate unchanged. A majority of market participants and analysts expected a rate hike to 7.0%. Inflation in Poland in September remained elevated at 17.2% Y/Y. ‘The Council assessed, that the hitherto significant monetary policy tightening by NBP and the expected economic activity growth slowdown … will contribute to curbing demand growth in the Polish economy, which will support a decline in inflation in Poland towards the NBP inflation target’. However, given persistence of the current shocks that remain beyond the impact of domestic monetary policy, a return of inflation towards the NBP inflation target will be gradual. A zloty appreciation more in line with the fundamentals of the Polish economy also could ease inflationary pressures. Further policy steps will be data dependent. The NBP also reiterates that it may intervene in the currency market to limit fluctuations of the zloty that are inconsistent with the direction of monetary policy. The zloty initially weakened to the EUR/PLN 4.84 area, but regained part of that loss later to close near EUR/PLN 4.82.
Rating agency Fitch lowered the outlook on its UK’s long term Long Term foreign currency rating from stable to negative. The credit rating stands at AA-. The revision amongst others was driven by the large and unfunded fiscal package announced as part of the government’s growth plan which could lead to a significant increase in fiscal deficits over the medium term. Without compensatory measures, the agency sees the government deficit at an elevated 7.8% of GDP in 2022, increasing to 8.8% in 2023. The general government debt to GDP ratio might go to 109% in 2024 from 101% this year. The rating agency also mentions increased policy uncertainty as the large fiscal stimulus and the inconsistency between fiscal and monetary policy stance, according the agency, negatively impacted financial markets’ confidence and credibility of the policy framework.