Market movers today
Today the two-day EU Council meeting kicks off. Measures to limit energy price increases will be the main focus of the talks, but discussions about another round of EU-backed borrowing could also take place behind the scenes.
We get September producer prices from Germany. It is an interesting release given the extreme development we have seen recently, which has also spilled over to two-digit consumer price inflation. Producer price inflation stood at 45.8% in August.
In Norway, we expect the manufacturing confidence survey to show a further deterioration in growth in Q3.
The parliamentary hearing of the Riksbank will be held today at 9.00 CET, after being postponed due to the new government announcement by PM Kristersson on Tuesday.
The central bank of Turkey meets today and we expect an unchanged policy rate of 12%.
The 60 second overview
Inflation: Despite the latest decline in natural gas and oil prices, consumer price inflation will remain elevated for some time yet in Europe. Soaring food prices drove UK inflation to 10.1% in September, intensifying pressure on the government and Bank of England to act. Euro area HICP inflation was revised a tad lower in the final reading to 9.9% in September. However, underlying inflation pressures remain strong and the weakening demand environment has yet to discourage consumer price increases on a broad scale. With no victory on the inflation fighting front yet in sight, we think ECB is gearing up for another 75bp hike at the meeting next week, read more in ECB Preview – Focus on the technicalities, 19 October.
Fed: US housing starts continued their decline in September, as rising mortgage rates take their toll. But hawkish Fed comments yesterday underlined that an end to monetary tightening is not yet in sight. Bullard expects “front-loading” of aggressive hikes to end only by early next year. Kashkari also said the Fed could potentially pause its rate increases sometime next year, but sees no evidence of core inflation moderating yet and Evans said the Fed may need to do more if price pressures get worse.
Oil: The Biden administration announced that another 15 million barrels will be released from the Strategic Petroleum Reserve in December to ease high gasoline prices. The sale would complete the release of the 180mn barrels Biden committed to injecting into the market in March, but the White House has retained the option of future intervention if petrol prices rise. Strategic reserves are already at the lowest level since 1984. Oil prices held steady around USD/bbl 92.
Equities: Rising yields set the tone in equity markets. Equities broke the two-day-streak of gains with Dow -0.3%, S&P 0.7%, Nasdaq -0.9% and small caps underperforming as Russell 2000 -1.7%. Despite rates rising, financials were one of the worst performers and in fact, communication services (Netflix) and tech were among the outperformers. As rates rise due to inflation – and not growth – rising yields is not triggering the value rotation we are used to in H1 2022. Futures are lower this morning too.
FI: The German finance agency (DFA) announced an increase of the outstanding amount of 18 bonds by EUR 3bn each into their own accounts. That decision was a catalyst to a sharp sell-off in European yields and ASW tightening (-6bp tighter ASW across maturities). It was particularly the belly of the curve that underperformed by 13-15bp, while the long end rose only marginally by 2bp, yet the latter was driven by a strong rally in long-end Gilts. The additional German expenses to fight the energy crisis as well as the repo market stress were the drivers behind DFA’s decision. DFA said that they would keep the funds at their Bundesbank account until year-end and over the turn of the year, but that the EUR 54bn may be included in the 2023 funding plan, which will be released in December. The repo market observed an initial relief. Spreads were broadly unchanged on the day.
FX: The shift in market sentiment has lifted the USD, while cyclically sensitive currencies are back trading on the back-foot. SEK and HUF were yesterday’s biggest underperformers, but also EUR and GBP downsides vs the greenback were prominent.
Credit: Credit indices were slightly soft yesterday, where iTraxx Xover closed 3.5bp wider and Main 1.2bp wider.
All leading indicators in Norway now point to a sharp slowdown in the economy, including manufacturing. We therefore expect the manufacturing confidence survey to show a further deterioration in growth in Q3, especially as new orders were already in negative territory last time around. Further, we will look for any tightening in credit standards in the Q3 senior loan survey from Norges Bank (NB). Finally, NB governor Wolden Bache will give a speech at the CME titled ‘Monetary policy and inflation’, which could be interesting even though NB rarely sends new signals in between MPC-meetings.
The parliamentary hearing of the Riksbank will be held today at 9.00 CET after being postponed due to the new government announcement by PM Kristersson on Tuesday. The last parliamentary hearing was held in February, just before the Riksbank U-turned, and hence today’s hearing will be interesting given the high inflation and worsening economic outlook. The Riksbank will be represented by Stefan Ingves and Per Jansson.
We also get house price data from Valueguard, which we expect to continue downwards in September. Home prices in Sweden are so far down by around 7% YTD.