Markets clearly are looking for a new unequivocal driver

Markets

Markets clearly are looking for a new unequivocal driver as established trends, especially in interest rate markets, are meeting short term resistance. Maybe the outcome of the US mid-term elections or Thursday’s October CPI release will be able to do so. However, yesterday markets had to rely on their own internal dynamics as there were no data to provide any directional input for trading. US yields reversed most of Friday’s dovish reaction to a payrolls report that we still consider as supporting the case further tightening/demand reduction. US yields gained 5/6 bps points across the curve. Maybe it’s a bit strange to call a it a dovish yield rise. Even so, the move was solely driven by a rise in inflation expectations. The 10-y US real yield (1.67%) maintained Friday’s correction. Whatever the reason, this (temporary) consolidation in the real yields apparently also facilitated a rather mild sentiment on other markets, including equities and the dollar. US equities gained between 1.31% (Dow) and 0.85% (Nasdaq). The dollar showed rather broad-based losses. DXY declined to close just north of the 110 barrier. The decline in USD/JPY was more modest (close 146.63). EUR/USD finished the day north of parity (1.002). The mild global sentiment also often favoured smaller currencies, with remarkably strong performance of CE currencies (EUR/CZK close 24.26 from 24.39 on Friday, EUR/HUF close 400.7 from 402.5 and EUR/PLN close 4.67 from 4.6875). German yields also stayed upwardly oriented gaining between 8.1 bps (2-y) and 3.4 bps (30-y). Especially yields at shorter maturities are only a whisker away from the cycle peak levels, but no clear break occurred yet. Bunds substantially underperformed swaps. For now we don’t draw firm conclusions from yesterday’s trading session, even as underlying optimism remains a bit remarkable post Powell’s hawkish press conference last week.

This morning most Asian markets are trading in positive territory, but often don’t fully capture to WS momentum. China underperforms (CSI 300 -1.27%) as uncertainty on the countries Covid strategy persists. The dollar gains modestly (DXY 110.42, EUR/USD 1.000). US yields also rise marginally this morning. Later today, the calendar is again thin. US NFIB small business confidence (expected to ease from 92.1 to 91.4) is an interesting pointer on the broader health of the US economy but for sure won’t be a game changer. The US Treasury will start a new bond auction cycle with a sale of $40 bln of 3-year notes, the followed by 10 & 30-year auctions later this week. Central bank speakers include ECB’s Wunsch, SNB’s Jordan and BoE’s Pill. We stay cautious to already jump on any broader risk-on repositioning annex sustained USD decline. EUR/USD 1.0094 remains a first ST reference on the technical charts.

News headlines

Poland is about to sell its first dollar-denominated bonds in six years. The country faces rising borrowing needs ahead of general elections expected in October next year, following amongst others increased military spending. But borrowing in its own currency comes at a significant cost with Polish yields having risen to the highest level in 20 years. At the same time the EU is still withholding some €35bn of post-pandemic aid over a conflict concerning changes in the Polish judiciary. The sale, expected for today, includes a 5-year and a 10-year dollar bond.

Adrian Orr has been appointed for another 5-year term as governor of the Reserve Bank of New Zealand. This provides the opportunity of completing one of the most aggressive tightening cycles in history as the RBNZ tries to get a grip on spiraling inflation (7.2% y/y in Q3). New Zealand was one of the first in October 2021 to start raising policy rates and paved the way for bigger-sized rate hikes. In exactly one year time, the RBNZ’s cumulative tightening amounted to 325 bps (from 0.25% to 3.50%). It is expected to continue the process: according to a quarterly survey published this morning, 2-year inflation expectations have jumped to 3.62% from 3.07%. NZ money markets currently see the terminal rate between 5.25 and 5.50%.