Sunset Market Commentary

Markets:

Market trends often have self-reinforcing dynamics, as illustrated by the strong uptrends in yields (Since mid-May) and the dollar (since mid-July). ‘Exhaustion’ of this kind of strong trend is often marked by data or news firmly coming out in line with the trend, but no longer supporting follow-through price action. Such a rupture occurred end last week. US yields and the dollar ran into resistance even after an outsized payrolls beat. The countermove was born. (Some) Fed members questioning the need for further tightening after the recent rise in yields helped to change the short-term market focus/narrative. Contrary to early last week, hawkish news doesn’t do the trick anymore. Soft messages now get more weight. There was little high profile news in EMU. Slightly higher than expected inflation expectations in the EMU consumer survey in the new environment evidently didn’t stop the bond market rebound. Some observers even see bonds taking back their safe haven status/inverse correlation with risk assets as geopolitical uncertainty reigns. We remain cautious to already draw this conclusion as long as the path of inflation returning to target remains highly uncertain. Short-term EMU/German yields are looking for a short-term equilibrium as the ECB is expected to keep the depo rate at 4% ‘sine die’, even in a risk-off context. The 2-y German yield at 3.09% adds 3 bps. The rally of longer bonds decisively continues with the 30-y ceding another 8 bps. The ‘spread rally’ in BTPS slowed. The 10-y Italian-German yield spread narrows just 1 bp (1,94%). Similar picture in the US with the 2-y gaining 4 bps. The 30-y is losing 8.5 bps (4.73% compared to a 5%+ peak on Friday). US September headline PPI at 0.5% M/M and 2.2% Y/Y printed above expectations. Core PPI was close to expectations. The market reaction was very limited. Later today, we keep an close eye at the Minutes of September Fedmeeting. The tone at the meeting was probably rather hawkish as a majority of the governors still saw a strong case for at least one additional 25 bps hike. We also look at the internal debate on a higher neutral policy rate. The US Treasury sells $35bn of 10-yr Notes. As indicated, we stay cautious to read any safe haven characteristics in the current bond market rally. Yesterday’s equity rebound lost some momentum (EuroStoxx +0.1%). US indices open mostly higher (Nasdaq % 0.5%). For now, oil doesn’t gain further on the Middle East tensions (Brent even eases slightly to $87/b).

In FX markets, the dollar rally stalled, but the correction momentum is less convincing than in bond markets. DXY is slowly drifting south (105.75 from 1053.8). EUR/USD (1.0615) struggles to extend gains beyond the 1.06 figure, with first resistance looming in the 1.0635/43 area (previous low/23.6% retracement decline since mid-July). The yen for now doesn’t profit from a smaller (negative) interest rate differential versus the likes of the dollar (USD/JPY 148.9, EUR/JPY 158 area). In technical trading, sterling again slightly outperforms (EUR/GBP 0.862, cable 1.2305). In Central Europe, the zloty outperforms with EUR/PLN easing to 4.51. Are markets anticipating a more EU friendly outcome at this weekend’s parliamentary elections?

News & Views:

Bloomberg cites sources close to the Indian government suggesting that the country will impose restrictions on its sugar exports after dry weather dried cane crops. The nation had its weakest monsoon season in five years and already introduced a quota system in 2022-2023, limiting exports to about 6 million tons compared with unrestricted levels of around 11 millon. Sugar futures already traded at highest levels in more than 12 years on supply concerns despite a bumper harvest from Brazil. Thailand, the second-largest exporter, is also expected to see reduced volumes because of the El Nino impact (severe draught).

The ECB published its August Consumer Expectations Survey. Median consumer inflation expectations for the next 12 months and those for three years ahead increased marginally, from 3.4% to 3.5% and from 2.4% to 2.5% respectively. Expectations for economic growth over the next 12 months became slightly more negative (-0.8% from -0.7%) and the expected unemployment rate in 12 months’ time increased marginally (11.1% from 11%). Expectations for growth in the price of homes over the next 12 months slightly increased (2.3% from 2.1%) as did expectations for mortgage interest rates 12 months ahead (5.2% from 5.1%)..