Market movers today
The G20 summit concludes in Bali and we look out for whether the communiqué indeed rejects an ‘era of war’ as previously rumoured.
Market focus will be on the US retail sales for October, especially after last week’s inflation downside surprise. Slowing consumption remains a necessary (though not sufficient) condition for a sustainable easing in inflation pressures. But it would not be the first time that US consumer spending has surprised on the upside amid elevated wage growth and high savings.
UK inflation could take another jump up in October, largely driven by a rise in utility bills. Bank of England Governor Bailey will appear before the Treasury committee to answer questions about monetary policy. ECB President Lagarde will give a speech in Frankfurt.
The 60 second overview
Last night, we heard initial reports of a Russian missile strike on Polish soil, near the Ukrainian border at the same time as a missile attack on Ukraine. Since then, however, both President Biden and his Polish counterparty Duda have questioned whether the missile was fired from Russia and there is still great uncertainty on the matter. President Duda has further commented that he is likely to invoke NATO article 4, meaning that the alliance will meet and discuss before any potential response and it is reported that NATO ambassadors will hold an emergency meeting this morning. Until we get more clarity on the matter, geopolitical tensions are likely to run high for the time being.
However, the missile attack on Ukraine was strongly condemned by NATO and G7. The Polish currency has weakened modestly vs. the EUR, 10Y US Treasury yields declined a few bps yesterday, but the yield has risen this morning in Asian trade. The missile attack will most likely also dominate the conclusions from the G20 meeting that ends today.
Yesterday, there were more comments from various Federal Reserve officials that the inflationary pressure is easing and that the size/pace of rate hikes is likely to slow.
We have UK inflation for October today and expectations are for a jump up to 10.7% in headline inflation compared to 10.1% in September, mainly driven by the new energy price cap (+27%) introduced in October. The core inflation on the other hand, is expected to print 6.4%, down from 6.5% in September. However, we do note that the range for estimates is very broad according to Bloomberg, both regarding the estimate for core and headline and the risk seems rather to be skewed towards the downside in core inflation.
Equities: Equities continued its march higher but with growth and quality stocks taking the lead again. This was driven a second confirmation on lower inflation ahead from the PPI figure. Equities even defied the news that Russian missiles killed two at the Polish border (i.e. NATO territory). Most sectors higher but communication services and retail leading. Futures are unchanged this morning.
FI: There was a solid rally in global fixed income markets yesterday driven from the long end of the curve. 10Y Bunds declined some 5-6bp, while 10Y Treasuries declined 6bp. Furthermore, the German ASW-spreads continue to tighten. The missile attack on Ukraine and the hits on Poland supported safe-haven flows into Treasuries.
FX: Initial reports of a Russian missile hitting Polish soil last night triggered a classic risk-off movement in FX: stronger USD and JPY, weaker SEK and even more weakness within CEE, where PLN took the blunt of the hit. These move have reversed somewhat over the night as there are conflicting reports whether the missile actually is from Russia or not. Nevertheless, tensions are running high.
Credit: Sentiment remains very strong in credit markets and yesterday iTraxx Xover tightened 13.5bp, closing in 463bp, while Main tightened 3bp to close in 93bp.
In Sweden, Prospera’s November money market inflation expectations are out at 08.00 CET. This is unlikely to rock the market as yesterday’s October inflation print solidified the 75bp rate hike that the market is already pricing (Riksbank’s forecast is 50bp). It would take a huge upside move in 5y expectations to, say, raise the bet for 100bp hike next week and that seems unlikely.