Sunrise Market Commentary

Markets

• Core bonds swung up and down yesterday. Supported initially by lower energy prices (Brent finished sub $103), things took a turn for the worse in early US dealings. We saw no clear trigger but yields began grinding higher and more so in the US than in Europe. The US 30-yr intraday rose to its highest level since 2002 (5.62%) while the 10-yr tenor fell just a couple of basis points short of such a near-quarter-century high. A sub-par JOLTS job openings report and September consumer confidence and, in later US trading hours, NY Fed Williams came to Treasuries’ rescue by pouring cold water on the idea of back-to-back rate hikes. The influential board member said there may be one more hike needed in late 2026 to be certain that inflation doesn’t become entrenched. But Williams also said there’s no need for urgency after the September move. The market implied probability for an October hike fell from 70% to less than 50%. Yields swiftly turned lower, especially at the front. Net daily changes eventually varied between -5.4 (2-yr) to +1.9 bps (30-yr). European swap yields added 3 bps in the 2-yr tenor with the remainder of the curve unchanged, underperforming vs Bunds in the process. The Japanese yen was the strongest performer on FX markets. The US dollar was a close second, leading to little changes in the USD/JPY pair. EUR/USD, on the other hand, temporarily fell through the now-former YtD low of 1.1325. At 1.1312, the couple started to recover to eventually finish at 1.1342. The euro lost out against GBP too. EUR/GBP drifted south to 0.857.
• Much of yesterday’s moves find their way in today’s session as well. For sterling in particular the news down below may have helped. PM Burnham this morning put it as explicit as possible: “rejoining the EU is an option for the UK.” It is a very long shot still but would make a bullish case for GBP. Interest rate markets recently dialed back their hawkish expectations in all corners of the advanced world. The implied probability for a back-to-back ECB hike for example is now 30%. The economic calendar today is about to challenge that. Spanish CPI numbers yesterday were already higher than expected. The big three are scheduled for release today: France, Germany and Italy. In the US, the Fed’s preferred PCE inflation gauge is on tap. The August print is expected to match July’s 3.7% on a headline and 3.3% on a core basis. Risks, if any, are probably tilted to the upside. We keep a close eye on EUR/USD. A sustained break below the YtD troughs paves the way for a return towards the 1.12 and then 1.11 area.

News & Views

• Australian headline inflation rose by 0.4% M/M in August, with the Y/Y-figure accelerating from 3.5% to 4% and moving further away from the RBA’s 2-3% inflation target. Housing was the largest contributor to annual inflation, rising by 5.7%, as builders passed on higher costs for materials and labour. Transport was the second largest contributor, rising by 5.6% due to higher automotive fuel prices. Core inflation, as measured by the trimmed mean gauge (which excludes fuel and electricity prices), rose by 0.2% M/M to stabilize at 3.6% Y/Y. Apart from that last figure, all numbers were 0.1 ppt below consensus estimates. Other core indicators hovered between 3.6% Y/Y and 3.9% Y/Y. Goods and services inflation printed at respectively 1% M/M & 4.2% Y/Y and -0.2% M/M and 3.7% Y/Y. Today’s inflation numbers arrive a day after the RBA raised its policy rate a fourth time this year to the highest level since 2011 (4.6%). RBA governor Bullock said that she hopes this move into restrictive territory will suffice, denting more aggressive rate hike bets. Markets reverse more hawkish bets this morning, with the market implied probability of another move before year-end dipping to 40%. AUD/USD extends the decline towards the lower bound of sideways trading channel in place since February (0.6865/34).
• UK PM Burnham told the crowd at the Labour Party’s annual conference yesterday that he’ll set out options for a new relationship with the EU later this year. A delayed summit between both will take place before year-end. His spokesman refused to rule out the option of rejoining the EU if such mandate would be given at next general elections. “Brexit has done more harm than good,” Burnham said. “We’ve lost some of the control we had over our economy, as a decade of low growth has put us in a weaker position, and we’ve lost some of our control over immigration.”