Curve flattening/inversion remained the ‘default’ option in EMU and US rates markets. Both EMU and US two-year yields hit multi-year highs as markets believe the Fed and ECB have little choice but to continue their frontloading game. At the same time, US markets Don’t completely give up the idea that there is a reason for the Fed consider lowering rates by the end of next year. The Fed is unlikely to support this idea.
US data was mixed. Retail sales increased slightly in August. July sales revised down. Weekly jobless claims (213k) remain low suggesting that labor demand remains solid. If the Fed is to tame inflation via demand moderation, there is still work to be done.
US yields rose between 6.6 basis points (2 years) and 0.8 basis points (30 years). The procession was full again the result of a higher real return (10-yr +8.6 basis points to 1.02%). EMU (swap) yields rose 1.3 basis points (10-yr) to 9.2 basis points (2-yr). The 30-year indicator eased slightly (-1.5 basis points). The EMU two-year yield surpassed the 2011 peak to close north of 2.50%.
ECB decision-makers (with the exception of Portuguese member Centeno) all acknowledged that decisive action is needed to bring inflation and inflation expectations back to more acceptable levels, Supporting the prevailing market trend. A sustained rise in real yields, with central bank tightening risking pushing the economy into recession (see World Bank below), keeps equities on the defensive.
US indices fell again to 1.43% (Nasdaq). Both the S&P and Nasdaq are at risk of falling below recent technical support (at 3809 or 11545) which, if so, would pave the way for a return to the June lows. Dollar remains strong (DXY close 109.74) but fails to force a fresh break to the upside for now. Markets contemplating the chances of interventions in countries like Japan and Scandinavia and EMU interest rates, at least after (or even beyond) moves in the US, lead to a kind of short-term (fragile) equilibrium for the time being. EUR/USD even closed marginally higher at par.
This morning, Asian equities remain under pressure Loss from op to 1.0%/1.5%. Chinese August Ecodates including manufacturing, retail sales and unemployment All printed better than expected but did nothing to change investor sentiment. Yuan weakens further north of USD/CNY 7.0. USD/JPY is trading little changed near 143.4. US yields are still drifting higher.
Later today the Final EMU August inflation and US consumer confidence from the University of Michigan are likely to take center stage. Final CPI data are not usually market movers, but an upward revision (if any) could only amplify the rise in near-term yields. In the Michigan Consumer Confidence survey, the market focus shifted from the activity sub-series to inflation expectations. The latter are expected to confirm the recent topping pattern. Still, we don’t expect this to have a profound impact on the market position ahead of the Fed. The dollar is currently in a consolidation pattern but recent/cycle highs remain within reach.
South Korea is considering contingency plans to stabilize the South Korean won. USD/KRW tested a 13-year high (low for the won) at 1400 in Asian trading this morning. Earlier in the year, the SK currency was trading below 1200. Finance Minister Choo Kyung-ho joined his counterparts in Japan in stepping up verbal interventions. He said so to Parliament The ministry is closely monitoring the market situation and said authorities would take action if necessary. The Bank of Kora recently warned that the won’s decline was too rapid relative to economic fundamentals. The central bank hiked interest rates by 25 basis points to 2.5% in August, signaling further tightening. However, the US Federal Reserve’s aggressive stance still favors the dollar versus the won, with the former also under pressure from rising/record trade deficits amid rising energy and commodity prices.
That The World Bank warned of a “devastating” recession next year as central banks hike interest rates at a rate not seen in decades. It called on monetary authorities in major economies to coordinate their actions to reduce the overall level of tightening. At the same time, more action is needed to boost production to ease price pressures, rather than focusing solely on containing spending. The World Bank said core inflation is likely to still be above 5% next year, adding that if that convinced central banks to become even more aggressive, Global economic growth would drop to just 0.5% in 2023.