Friday’s payrolls report initially added to market conviction of the Fed’s tightening cycle having come to an end already. The labour market is indeed showing signs of normalizing but is it going fast enough? Second thoughts crept in, with the US manufacturing ISM published a little later adding to the doubt. The interest rate-sensitive sector is still facing contraction but continues to bottom out nevertheless. The headline figure rose from 46.4 to a higherthan-expected 47.6. New orders snapped a two-month recovery (46.8) but employment jumped 4 points to 48.5. Prices paid sharply rose too, from 42.6 to 48.4, suggesting a cautious return of price pressures. US yields extended their intraday comeback, resulting in changes between +1.6 bps (2-y) and +8.2 bps (30-y). German yields followed their US peers, adding 1.2 to 9.1 bps in similar curve steepening. The dollar rebounded. EUR/USD lost the 200dMA to close at the lower bound of the 2023 upward sloping trend channel just south of 1.08 (1.078). DXY (trade-weighted dollar) rallied from an intraday low of 103.27 to 104.23 – the highest close since end May. USD/JPY surged, in first instance back above 145, then 146. Sterling barely budged against the euro but dipped towards the recent lows against USD (GBP/USD closed at 1.259). Stock markets showed little direction. They ended slightly lower in Europe while eking out small gains in the US. Asian-Pacific shares are better bid this morning. Hong Kong and China outperform. The string of economic measures announced in the past two weeks is bolstering investor confidence. Regional benchmarks add 1-2.4%. This risk on environment weighs the dollar down a bit. EUR/USD stabilizes around Friday’s closing levels, DXY loses very marginally to 104.13. US cash bond markets are closed for Labour Day today, but futures are trending south. German Bunds underperform in early European trading. Belgian ECB governor Wunsch over the weekend said rates may have to be hiked once more (see below).
It’s going to be a slow start of the week in absence of US investors and an uninspiring economic calendar. Speeches from ECB’s Nagel and Lagarde are worth mentioning but aren’t due until late afternoon trading hours. German yields ready for a higher open. The 10-y yield could test the recently lost support-turned-into-resistance around 2.58%/2.60%. Overall risk sentiment is probably the key factor for currency markets. Despite a slightly weaker USD this morning, EUR/USD remains at risk of losing the trend channel. We are looking at 1.0735 first in case of a break today. That said, we wouldn’t draw too many technical conclusions from it before it gets confirmed. Attention later this week shifts to the ECB’s consumer inflation expectations survey and the RBA (tomorrow) & the US services ISM, the Bank of Canada and BoE governor Bailey’s parliamentary testimony on Wednesday.
News and views
Rating agency Moody’s on Friday affirmed the Hungarian sovereign credit rating at Baa2 with a stable outlook. According to the agency, the assessment is balancing credit strengths and challenges. Moody’s sees a solid medium term growth outlook. Hungarian fiscal strength is seen as robust with a moderately high debt burden. The agency sees weaknesses at the institutional level which have been the cause of the contentious relationship with the EU and Hungary’s main credit challenge. It causes uncertainty about the disbursement of significant amounts of EU funds. The stable outlook reflects the agency’s view that risks to the country’s credit profile are balanced. Moody’s expects the country’s debt burden to continue on its downward trajectory and that it ultimately will receive most EU funds, albeit in a noisy step-by-step process. Moody’s expects a solid trend growth estimated at 3% over 2018- 2027. This year, growth is stagnating, before rebounding to 3% in 2024. The fiscal deficit is projected at 4.2% of GDP in 2023 and 3.5% in 2024 compared to 6.2% in 2022. Moody’s estimates that the combination of strong nominal GDP growth and a smaller fiscal deficit will result a the debt to GDP ratio of 67.8% in 2024. Inflation is set to ease to single digits end 2023 and at 3.4% at the end of 2024.
In an interview with the Belgian Public radio, ECB governing Council member Wunsch indicated that the ECB might have to raise rates interest rates a bit more before coming to a pause. According to the governor of the Belgian National Bank, it’s too soon to talk about a real stop in the hiking cycle as inflation remains very persistent. Wunch sees price pressures decreasing, but it won’t reach the 2% target before 2025.