It was supposed to be a 7% ramp into month-end on billions in pension fund residual buying.
Instead, it ended up being more or less the opposite, with crypto-led liquidations dragging futures and global markets lower, and extending Wednesday losses after central bankers issued warnings on inflation and fueled concern that aggressive policy will end with a hard-landing recession, which increasingly more now see as being 2022 business, an outcome that now appears assured especially after yesterday's disastrous guidance cut from RH, the second in three weeks!
Recession fears and inflation woes may be prolonged by today's PCE deflator report. The consumer price gauge favored by the Fed may have picked up to 6.4% last month from 6.3%. Personal income growth probably edged up but Bloomberg Economics highlights an anticipated decline in real personal spending as a major worry.
Meanwhile, China’s economy showed further signs of improvement in June with a strong pickup in services and construction, even if the latest Chinese PMI print came slightly below expectations. Also overnight, Russia said it withdrew troops from Ukraine’s Snake Island in the Black Sea after Ukraine said its forces drove Russian troops from the area.
In any case, with zero demand from pensions so far (even though the continued selling in stocks and buying in bonds will only make the imabalnce bigger), overnight Nasdaq 100 contracts dropped 1.8% while S&P 500 futures declined 1.3%, and cryptos crumbled, with bitcoin dragged back below $19000 and Ether on the verge of sliding below $1000. The tech-heavy gauge managed to end Wednesday’s trading slightly higher, while the S&P 500 fell for a third straight day. In Europe, the Stoxx Europe 600 Index slid 1.9%. Treasuries gained, the dollar was steady and gold declined and crude oil futures edged lower again.
Which brings us to the last trading day of a quarter for the history books: the S&P 500 is set for its biggest 1H decline since 1970 and the Nasdaq 100 since 2002, the height of the dot.com bust. The Stoxx 600 is set for the worst 1H since 2008, the height of the GFC.
Traders have ramped up bets that the global economy will buckle under central bank tightening campaigns -- and that policy makers will eventually backpedal. The bond market shifted to price in a half-point rate cut in the Federal Reserve’s benchmark rate at some point in 2023. On Wednesday, during the annual ECB annual forum, Fed Chair Jerome Powell and his counterparts in Europe and the UK warned inflation is going to be longer lasting. A view that central banks need to act fast on rates because they misjudged inflation has roiled markets this year, with global stocks about to close out their worst quarter since the three months ended March 2020.
“Markets are worried about growth as central bankers continue to emphasize that bringing down inflation is their overriding objective, and that it may take time to bring inflation down,” said Esty Dwek, chief investment officer at Flowbank SA. “We still haven’t seen total capitulation in markets, so further downside is possible.”
Meanwhile, the cost of insuring European junk bonds against default crossed 600 basis points for the first time in two years on Thursday.
And speaking of Europe, stocks are also down over 2% in early trading, with all sectors in the red. DAX and CAC underperform at the margin with autos, consumer discretionary and banking sectors the weakest within the Stoxx 600. Here are some of the biggest European movers today:
- Uniper shares slump as much as 23% after the German utility withdrew its outlook and said it was discussing a possible bailout from the German government following Russia’s move to curb natural gas deliveries.
- SAP sinks as much as 6.5% after Exane BNP Paribas downgraded stock to neutral from outperform, saying it sees risks on demand side in the near term as software spending decisions come under increased scrutiny.
- Sanofi shares decline as much as 4.5% after the French drugmaker said the FDA placed late-stage clinical trials of tolebrutinib on partial hold in US because of concerns about liver injuries.
- European semiconductor stocks fell, following peers in the US and Asia lower amid growing concerns that the industry might face a downturn soon as chip stockpiles build. ASML drops as much as 3.4%, Infineon -4.1%, STMicro -3.1%
- Norsk Hydro shares slide as much as 6% amid metals decline and as DNB cuts the stock to sell from hold, citing concerns about rising aluminum supply.
- Stainless steel stocks in Europe fall, with Morgan Stanley saying the settlement on the latest ferrochrome benchmark missed its expectations. Outokumpu shares down as much as 6.6%, Aperam -7.2%, Acerinox -4%
- Saab shares jump as much as 8.4%, after getting an order worth SEK7.3b from the Swedish Defence Materiel Administration for GlobalEye Airborne Early Warning and Control aircraft.
- Orsted shares rise as much as 2.5%, before paring some of the gains. HSBC raises to buy from hold, saying any further downside for the wind farm operator looks limited.
- Bunzl shares rise as much as 2.6% after the specialist distribution company said it now expects very good revenue growth in 2022.
- Grifols shares rise as much as 7.8% after slumping on Wednesday, as the company says that the board isn’t analyzing any capital increase “for the time being.”
Earlier in the session, Asian stocks fell for a second day as tech-heavy indexes in Taiwan and South Korea continued to get pummeled amid concerns over the potential for aggressive monetary tightening in the US to rein in inflation. The MSCI Asia Pacific Index declined as much as 1.2%, dragged down by technology shares including TSMC, Alibaba and Tencent. Taiwan slid more than 2%, while gauges in Japan, South Korea, Australia dropped more than 1%. Stocks in mainland China rose more than 1% after the economy showed further signs of improvement in June with a strong pickup in services and construction as Covid outbreaks and restrictions were gradually eased. Traders are also watching Chinese President Xi Jinping’s trip to Hong Kong, his first time outside of the mainland since 2020.
Asian stocks are struggling to recover from a May low as the threat of higher US rates outweighs China’s emergence from strict Covid lockdowns and its pledge of stimulus measures. While mainland Chinese stocks led gains globally this month, the rest of the markets in the region -- especially those heavy with technology stocks and exporters -- saw hefty outflows of foreign funds. “Investors continue to assess recession and also inflation risks,” Marcella Chow, JPMorgan Asset Management’s global market strategist, said in an interview with Bloomberg TV. “This tightening path has actually increased the chance of a slower economic growth going forward and probably has brought forward the recession risks.” Asian stocks are set to post a more than 12% loss this quarter, the worst since the one ended March 2020 during the pandemic-induced global market rout.
Japanese stocks declined after the release of China’s data on manufacturing and non-manufacturing PMIs that showed slower than expected improvements. The Topix Index fell 1.2% to 1,870.82 as of market close Tokyo time, while the Nikkei declined 1.5% to 26,393.04. Sony Group contributed the most to the Topix Index decline, falling 3.4%. Out of 2,170 shares in the index, 531 rose and 1,574 fell, while 65 were unchanged. “Although China is recovering from a lockdown, business sentiment in the manufacturing industry is deteriorating around the world,” said Tomo Kinoshita, global market strategist at Invesco Asset Management China’s Economy Shows Signs of Improvement as Covid Eases.
Indian stock indexes posted their biggest quarterly loss since March 2020 as the global equity market stays rattled by high inflation and a weakening outlook for economic growth. The S&P BSE Sensex ended little changed at 53,018.94 in Mumbai on Thursday, while the NSE Nifty 50 Index dropped 0.1%. The gauges shed more than 9% each in the June quarter, their biggest drop since the outbreak of pandemic shook the global markets in March 2020. The main indexes have fallen for all but one month this year as surging cost pressures forced India’s central bank to raise rates twice and tighten liquidity conditions. The selloff is also partly driven by record foreign outflows of more than $28b this year. Despite the turmoil in global markets, Indian stocks have underperformed most Asian peers, partly helped by inflows from local institutions, which made net purchases of more than $30b of local stocks. “Investors worry that the latest show of central bank determination to tame inflation will slow economies rapidly,” HDFC Securities analyst Deepak Jasani wrote in a note. Fourteen of the 19 sector sub-gauges compiled by BSE Ltd. fell Thursday, with metal stocks leading the plunge. The expiry of monthly derivative contracts also weighed on markets. For the June quarter, metal stocks were the worst performers, dropping 31% while information technology gauge fell 22%. Automakers led the three advancing sectors with 11.3% gain.
Australian stocks also tumbled, with the S&P/ASX 200 index falling 2% to close at 6,568.10, weighed down by losses in mining, utilities and energy stocks. In New Zealand, the S&P/NZX 50 index fell 0.8% to 10,868.70
In rates, treasuries advanced, led by the belly of the curve. German bonds surged, led by the short-end and outperforming Treasuries. US yields richer by as much as 5.4bp across front-end and belly of the curve which outperforms, steepening 2s10s, 5s30s by 2bp and 2.8bp; wider bull-steepening move in progress for German curve with yields richer by up to 13.5bp across front-end with 2s10s wider by 3.5bp on the day. US 10-year yields around 3.055%, richer by 3.5bp. Money markets aggressively trimmed ECB tightening bets on relief that French June inflation didn’t come in above the median estimate. Bonds also benefitted from haven buying as stocks slide. Month-end extension flows may continue to support long-end of the Treasuries curve. bunds outperform by 7bp in the sector. IG issuance slate empty so far; Celanese Corp. pushed back plans to issue in euros and dollars, most likely to next week, after deals struggled earlier this week. Focal points of US session include PCE deflator and MNI Chicago PMI.
In FX, the Bloomberg Dollar Spot Index was steady as the greenback traded mixed against its Group-of-10 peers. The yen advanced and Antipodean currencies were steady against the greenback. French inflation quickened to the fastest since the euro was introduced. Steeper increases in energy and food costs drove consumer-price growth to 6.5% in June from 5.8% in May . Sweden’s krona swung to a loss. It briefly advanced earlier after the Riksbank raised its policy rate by 50bps, as expected, signaled faster rate hikes and a quicker trimming of the balance sheet. The pound rose, snapping three days of losses against the dollar. UK household incomes are on their longest downward trend on record, as the nation’s cost of living crisis saps the spending power of British households. Separate figures showed that the current-account deficit widened sharply to £51.7 billion ($63 billion) in the first quarter. The yen rose and the Japan’s bonds inched up. The BOJ kept the amount and frequencies of planned bond purchases unchanged in the July-September period. The Australian dollar reversed a loss after data showed China’s official manufacturing purchasing managers index rose above 50 for the first time since February in a sign of improvement in the world’s second largest economy.
Bitcoin is on track for its worst quarter in more than a decade, as more hawkish central banks and a string of high-profile crypto blowups hammer sentiment. The 58% drawdown in the biggest cryptocurrency is the largest since the third quarter of 2011, when Bitcoin was still in its infancy, data compiled by Bloomberg show.
In commodities, WTI trades a narrow range, holding below $110. Brent trades either side of $116. Most base metals trade in the red; LME zinc falls 3.1%, underperforming peers. Spot gold falls roughly $3 to trade near $1,814/oz. Bitcoin slumps over 6% before finding support near $19,000.
Looking to the day ahead now, data releases include German retail sales for May and unemployment for June, French CPI for June, the Euro Area unemployment rate for May, Canadian GDP for April, whilst the US has personal income and personal spending for May, the weekly initial jobless claims, and the MNI Chicago PMI for June.
- S&P 500 futures down 1.2% to 3,775.75
- STOXX Europe 600 down 1.8% to 406.18
- MXAP down 1.0% to 158.01
- MXAPJ down 1.1% to 524.78
- Nikkei down 1.5% to 26,393.04
- Topix down 1.2% to 1,870.82
- Hang Seng Index down 0.6% to 21,859.79
- Shanghai Composite up 1.1% to 3,398.62
- Sensex up 0.2% to 53,136.59
- Australia S&P/ASX 200 down 2.0% to 6,568.06
- Kospi down 1.9% to 2,332.64
- Gold spot down 0.2% to $1,814.91
- US Dollar Index little changed at 105.04
- German 10Y yield little changed at 1.42%
- Euro little changed at $1.0443
- Brent Futures down 0.4% to $115.85/bbl
Top Overnight News from Bloomberg
- The surge in the dollar has set Asian currencies on course for their worst quarter since the 1997 financial crisis and created a dilemma for central bankers
- French Finance Minister Bruno Le Maire said the EU can deliver the global minimum corporate tax with or without the support of Hungary, circumventing Budapest’s veto earlier this month just as the bloc was on the brink of a agreement
- German unemployment unexpectedly rose, snapping 15 straight months of decline as refugees from the war in Ukraine were included in those searching for work
- The SNB bought foreign exchange worth 5.7 billion francs ($5.96 billion) in the first quarter of 2022 as the franc sharply appreciated against the euro and briefly touched parity in March
- The ECB plans to ask the region’s lenders to factor in the economic hit of a potential cut off of Russian gas when considering payouts to shareholders
- European stocks were poised for their biggest drop in any half-year period since 2008, as investors focused on the prospects for economic slowdown and stubbornly high inflation in the region
- New Zealand will enter a recession next year that could be deeper than expected, Bank of New Zealand economists said after a survey showed business sentiment continues to slump
A more detailed look at global markets courtesy of Newsquawk
Asia-Pac stocks were varied at month-end amid a slew of data releases including mixed Chinese PMIs. ASX 200 was dragged lower by weakness in energy, miners and the top-weighted financials sector. Nikkei 225 declined after disappointing Industrial Production data and with Tokyo raising its virus infection level. Hang Seng and Shanghai Comp. were somewhat mixed with Hong Kong indecisive and the mainland underpinned after the latest Chinese PMI data in which Manufacturing PMI printed below estimates but Non-Manufacturing PMI firmly surpassed forecasts and along with Composite PMI, all returned to expansion territory.
Top Asian News
- NATO Secretary General Stoltenberg said China's growing assertiveness has consequences for the security of allies, while he added China is not our adversary, but we must be clear-eyed about the serious challenges it presents.
- US blacklisted 5 Chinese firms for allegedly helping Russia in which Connec Electronic, King Pai Technology, Sinno Electronics, Winnine Electronic and World Jetta Logistics were added to the entity list which restricts access to US technology, according to WSJ.
- Japan's government cut its assessment of industrial production and noted that production is weakening, while it stated that Japan's motor vehicle production declined 8% M/M and that industrial production likely saw the largest impact of Shanghai's COVID-19 lockdown in May, according to Reuters.
- Tokyo metropolitan government will reportedly increase COVID infections level to the second-highest, according to FNN.
It’s been a downbeat session for global equities thus far as sentiment deteriorates further. European bourses are lower across the board, with losses extending during early European hours. European sectors are all in the red but portray a clear defensive bias. Stateside, US equity futures have succumbed to the glum mood, with the NQ narrowly underperforming.
Top European News
- Riksbank hiked its Rate by 50bps to 0.75% as expected, and said the rate will be raised further and it will be close to 2% at the start of 2023. Bank said the balance sheet its to shrink faster than previously flagged, and suggested that policy rate will increase faster if needed. Click here for details.
- Riksbank's Ingves said inflation over forecast probably not enough for Riksbank to hold extra policy meeting in summer. Ingves added that if the situation requires a 75bps hike, then Riksbank will carry out a 75bps hike.
- Orsted Gains as HSBC Upgrades With Shares Seen ‘Good Value’
- Aston Martin Extends Losses as Carmaker Reportedly Seeking Funds
- Climate Litigants Look Beyond Big Oil for Their Day in Court
- Ukraine Latest: Putin Warns NATO on Moving Military to Nordics
- DXY extends on gains above 105.00, but could see more upside on safe haven demand and residual rebalancing flows over fixes - EUR/USD inches towards 1.0400 to the downside.
- Yen regroups as yields drop and risk sentiment deteriorates to compound corrective price action.
- Franc unwinds some of its recent outperformance and Loonie lose traction from oil ahead of Canadian GDP.
- Swedish Crown unable to take advantage of hawkish Riksbank hike in face of risk aversion - Eur/Sek stuck in a rut close to 10.7000.
- Pound finds some underlying bids into 1.2100 and Kiwi at 0.6200, while Aussie holds above 0.6850 with encouragement from China’s services PMI that also propped the Yuan.
- Bonds on bull run into month, quarter and half year end - Bunds top 148.00 at best, Gilts approach 113.50 and 10 year T-note just a tick away from 118-00.
- Debt in demand on safe haven grounds rather than duration as curves steepen on less hawkish/more dovish market pricing.
- Italian supply comfortably covered to keep BTP futures propped ahead of US PCE data and yet another speech from ECB President Lagarde.
- WTI and Brent front-month futures are resilient to the broader risk downturn, and firmer Dollar as OPEC+ member members gear up for what is expected to be a smooth meeting.
- Spot gold is uneventful but dipped under yesterday's low, with potential support at the 15th June low at USD 1,806.59/oz.
- Base metals are softer across the board amid the broader risk profile. Dalian and Singapore iron ore futures were on track for quarterly losses.
- Ship with 7,000 tonnes of grain leaves Ukraine port, according to pro-Russia officials cited by AFP.
US Event Calendar
- 08:30: June Initial Jobless Claims, est. 229,000, prior 229,000
- 08:30: June Continuing Claims, est. 1.32m, prior 1.32m
- 08:30: May Personal Income, est. 0.5%, prior 0.4%
- 08:30: May Personal Spending, est. 0.4%, prior 0.9%
- 08:30: May Real Personal Spending, est. -0.3%, prior 0.7%
- 08:30: May PCE Deflator MoM, est. 0.7%, prior 0.2%
- 08:30: May PCE Deflator YoY, est. 6.4%, prior 6.3%
- 08:30: May PCE Core Deflator YoY, est. 4.8%, prior 4.9%
- 08:30: May PCE Core Deflator MoM, est. 0.4%, prior 0.3%
- 09:45: June MNI Chicago PMI, est. 58.0, prior 60.3
DB's Jim Reid concludes the overnight wrap
We’ve just released the results of our monthly EMR survey that we conducted at the start of the week. It makes for some interesting reading, and we’re now at the point where 90% of respondents are expecting a US recession by end-2023, which is up from just 35% in our December survey. That echoes our own economists’ view that we’re going to get a recession in H2 2023, and just shows how sentiment has shifted since the start of the year as central banks have begun hiking rates. When it comes to people’s views on where markets are headed next, most are expecting many of the themes from H1 to continue, with a 72% majority thinking that the S&P 500 is more likely to fall to 3,300 rather than rally to 4,500 from current levels, whilst 60% think that Treasury yields will hit 5% first rather than 1%. Click here to see the full results.
When it comes to negative sentiment we’ll have to see what today brings us as we round out the first half of the year, but if everything remains unchanged today we’re currently set to end H1 with the S&P 500 off to its worst H1 since 1970 in total return terms. And there’s been little respite from bonds either, with US Treasuries now down by -9.79% since the start of the year, so it’s been bad news for traditional 60/40 type portfolios. Ultimately, a large reason for that has been investors’ fears that ongoing rate hikes to deal with inflation will end up leading to a recession, and yesterday saw a continuation of that theme, with Fed Chair Powell, ECB President Lagarde and BoE Governor Bailey all reiterating their intentions in a panel at the ECB’s Forum to return inflation back to target.
In terms of that panel, there weren’t any major headlines on policy we weren’t already aware of, although there was a collective acknowledgement of the risk that inflation could become entrenched over time and the need to deal with that. Fed Chair Powell described the US economy as in “strong shape”, but one that ultimately requires much tighter financial conditions to bring inflation back to target. Year-end fed funds expectations remained steady in response, down just -0.7bps to 3.45%. However, further out the curve the simmering slower growth narrative continued to grip markets and sent 10yr Treasury yields -8.2bps lower to 3.09%, and the 2s10s another -1.1bps flatter to 4.7bps. In line with a tighter Fed policy path and slower growth, 10yr breakevens drove the move in nominal yields, falling -8.2bps to 2.39%, their lowest levels since January, having entirely erased the gains seen after Russia’s invasion of Ukraine, when it peaked above 3% at one point in April. Along with 2s10s flattening, the Fed’s preferred measure of the near-term risk of recession, the forward spread (the 18m3m – 3m), similarly flattened by -5.7bps, hitting its lowest level in nearly four months at 154bps. And thismorning there’s only been a partial reversal of these trends, with 10yr Treasury yields (+1.3bps) edging back up to 3.10% as we go to press. Over in equities, the S&P 500 bounced around but finished off of its intraday lows with just a -0.07% decline, again with the macro view likely skewed by quarter-end rebalancing of portfolios. The NASDAQ was similarly little changed on the day, falling a mere -0.03%.
In terms of the ECB, President Lagarde said on that same panel that she didn’t think “we are going back to that environment of low inflation” that was present before the pandemic. But when it came to the actual data yesterday there was a pretty divergent picture. On the one hand, Spain’s CPI for June surprised significantly on the upside, with the annual inflation rising to +10.0% (vs. +8.7% expected) on the EU’s harmonised measure. But on the other, the report from Germany then surprised some way beneath expectations, coming in at +8.2% on the EU-harmonised measure (vs. +8.8% expected). So mixed messages ahead of the flash CPI print for the entire Euro Area tomorrow.
As in the US, there was a significant rally in European sovereign bonds, with yields on 10yr bunds (-10.7bps), OATs (-10.7bps) and BTPs (-16.0bps) all moving lower on the day. Equities also lost significant ground amidst the risk-off tone, and the STOXX 600 shed -0.67% as it caught up with the US losses from the previous session. That risk-off tone was witnessed in credit as well, where iTraxx Crossover widened +21.5bps to a post-pandemic high. At the same time, there were further concerns in Europe on the energy side, with natural gas futures up by +8.06% to a three-month high of €139 per megawatt-hour, which follows a reduction in capacity yesterday at Norway’s Martin Linge field because of a compressor failure.
Whilst monetary policy has been the main focus for markets lately, we did get some headlines on the fiscal side yesterday too, with a report from Bloomberg that Senate Democrats were working on an economic package that had smaller tax increases in order to reach a deal with moderate Democratic senator Joe Manchin. For reference, the Democrats only have a majority in the split 50-50 senate thanks to Vice President Harris’ tie-breaking vote, so they need every Democrat Senator on board in order to pass legislation. According to the report, the plan would be worth around $1 trillion, with half allocated to new spending, and the other half cutting the deficit by $500bn over the next decade.
Overnight in Asia we’ve seen a mixed market performance overnight. Most indices are trading lower, including the Nikkei (-1.45%) and the Kospi (-0.81%), but Chinese equities have put in a stronger performance after an improvement in China’s PMIs in June, and the CSI 300 (+1.62%) and the Shanghai Comp (+1.31%) have both risen. That came as manufacturing activity expanded for the first time in four months, with the PMI up to 50.2 in June (vs. 50.5 expected) from 49.6 in May. At the same time, the non-manufacturing climbed to 54.7 points in June, up from 47.8 in May, which also marked the first time it’d been above the 50 mark since February.
Nevertheless, that positivity among Chinese equities are proving the exception, with equity futures in the US and Europe pointing lower, with those on the S&P 500 (-0.28%) looking forward to a 4th consecutive daily decline as concerns about a recession persist.
When it came to other data yesterday, the third estimate of US GDP for Q1 saw growth revised down to an annualised contraction of -1.6% (vs. -1.5% second estimate). Separately, the Euro Area’s M3 money supply grew by +5.6% year-on-year in May (vs. +5.8% expected), which is the slowest pace since February 2020.
To the day ahead now, data releases include German retail sales for May and unemployment for June, French CPI for June, the Euro Area unemployment rate for May, Canadian GDP for April, whilst the US has personal income and personal spending for May, the weekly initial jobless claims, and the MNI Chicago PMI for June.
How bonds work and why everyone is talking about them right now: a finance expert explains
Investor confidence in the UK is at a low, and the bond market has reacted dramatically.
The Bank of England is buying bonds again. Just as it was about to start selling the debt it had accumulated as part of its last effort to support the economy during the COVID-19 pandemic, the central bank has been forced to announce a new scheme to shore up investor confidence.
The bank’s £65 billion short-term spree aims to address the slump in bond prices caused by investors rushing to sell after the government’s recent mini-budget. This led to a surge in bond yields that hiked borrowing costs for the government and spread to pensions, housing and the general economy. So far, it has had a limited initial impact on the markets.
We asked an expert in finance to explain what’s going on in bond markets.
What is a bond and what is the difference between bond prices and yields?
A bond is essentially a tradeable IOU. It’s a loan that investors make to issuers such as companies or governments (UK government bonds are often called gilts). A bond has a price at which it can be sold and a yield, which is an annual amount the investor receives for holding the bond, a bit like interest on a savings account, and is expressed as a percentage of the current price.
When the price of a bond falls, it signals less demand for the bond because fewer investors want to own it. At the same time, the yield rises, which represents a higher cost of borrowing for companies or governments that issued the bond because this is what they have to pay to investors.
In the days since the government’s mini-budget, yields on 10-year Treasury bonds – which are issued by the UK government – increased from approximately 3.5% to 4.52% – the highest since the 2007-2008 global financial crisis. The expectation of continued increases prompted the recent intervention by the Bank of England.
UK government 10-year bond yields
What causes bond yields to move?
To understand this, it is important to bear in mind that, while people often talk about the interest rate, there are actually a number of rates. This includes the rate at which the central bank lends to commercial banks (the base rate), the rate that banks lend to each other (the interbank rate), the rate that the government borrows at (Treasury yields) and the rate at which households and firms borrow (commercial loans and mortgages).
When the Bank of England changes the base rate, this cascades through all these rates. As such, the Bank of England carefully considers the state of the economy – that is, growth and inflation – when deciding on the base rate.
When an economy is growing, interest rates and bond yields tend to rise. The occurs for several reasons. Investors sell bonds to buy riskier assets with better returns. Firms and households also look to borrow more money in a growing economy, for example, to invest in new machinery or to move home. More demand for borrowing means lenders can charge higher interest on their loans.
Higher inflation often accompanies economic growth because of the increase in demand for goods and services. This tightens supply and causes prices to rise (including wages for labour). The Bank of England, which is mandated by the government to try to keep inflation as close to 2% as possible, will respond to higher inflation by raising base rates, which, as noted, feeds through to the different rates.
Investors will often anticipate the increase in base rates and look to act before it goes up by selling Treasury bonds and buying alternative, higher return, assets. This causes bond yields to rise further. As a result, the Treasury bond yield is often seen as a predictor of future Bank of England base rate changes.
So, if yields are rising, does this mean that investors are expecting future economic growth in the UK?
No, not at the moment. When the government raises money by issuing bonds, it does so over a range of time periods (called maturities), from one day to 30 years. When an economy is expected to grow, the yield on longer-term bonds will be higher than the yield on shorter-term bonds.
This relationship between yields across different maturities is referred to as the term structure or yield curve. An upward sloping yield curve implies a growing economy. At the moment, the UK yield curve is flat, or even downward-sloping across some maturities. My research shows that a falling yield curve is a good predictor of a coming recession.
Yield curve for UK government bonds
It’s important to remember that these different yields act as a benchmark for commercial lending rates of equivalent lengths. The approximate jump to 4.5% in 2-year and 5-year yields has been reflected in mortgage rates, which is why some lenders have pulled available mortgage deals recently while they reassess the lending rates charged to households.
But if the UK economy is not expected to perform well, why have bond yields been rising after the chancellor’s mini-budget announcement?
The rising bond yields we are seeing relate to an additional factor: the amount of government debt. The mini-budget introduced tax cuts and increased spending and investors know the government will need to increase borrowing to meet these commitments. Some estimates put potential government borrowing at £190 billion due to this plan.
An increase in the amount a homeowner borrows versus the value of their home (called the loan-to-value) causes the mortgage rate charged to the borrower to rise. Similarly, an increase in the amount of bonds that the government will be looking to sell (the amount it wants to borrow) will push down the price of existing bonds, increasing yields. More importantly, more debt without growth raises the risk level of the UK economy.
Anticipating this, investors triggered a large-scale bond sell-off after the government’s mini-budget announcement. This contributed to the fall in the value of the pound as investors selling UK Treasury bonds bought US bonds instead, essentially swapping pounds for dollars.
So will the Bank of England’s plan work?
The intervention will have a short-term positive impact, which started as soon as it was announced. But the bank is really only buying time. Any ultimate success depends on the government restoring investor confidence in its economic plans.
Unfortunately, rising yields and borrowing costs for the UK economy is the price we are now paying for the government’s recent fiscal announcement.
David McMillan does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.recession pandemic covid-19 economic growth treasury bonds bonds yield curve government bonds government debt mortgage rates pound spread interest rates uk
August data shows UK automotive sector heading for a “cliff-edge” in 2023
With an all-out macroeconomic storm brewing in the UK, the Bank of England (BoE) has been forced to intervene in the tumultuous gilt markets, particularly…
With an all-out macroeconomic storm brewing in the UK, the Bank of England (BoE) has been forced to intervene in the tumultuous gilt markets, particularly towards the tail end of the yield curve (details of which were reported on Invezz here).
Car manufacturing is a key industry in the UK. Recently, it registered a turnover of roughly £67 billion, provided direct employment to 182,000 people, and a total of nearly 800,000 jobs across the entire automotive supply chain, while contributing to 10% of exports.
Just after midnight GMT, data on fresh car production for the month of August was released by the Society of Motor Manufacturers and Traders Limited (SMMT).
Strong annual growth but monthly decline
Car production in the UK surged 34% year-over-year settling at just under 50,000 units. This marked the fourth consecutive month of positive growth on an annual basis.
However, twelve months ago, production was heavily dampened by a plethora of supply chain bottlenecks, work stoppages on account of the pandemic, and a worldwide shortage of microchips. The August 2021 output of 37,246 units was the lowest recorded August volume since way back in 1956.
Although the improvement in output is a good sign, equally it is on the back of a heavily depressed performance.
To place the latest data in its proper context, production is still 45.9% below August 2019 levels of 92,158 units, showing just how far adrift the industry is from the pre-pandemic period.
Since July, production in the sector fell 14%.
The fact that the UK is facing a deep economic malaise becomes even more evident when we look at full-year numbers for 2020 and 2021.
In 2020, total output came in at 920,928 units, while 2021 was even lower at 859,575. The last time that the UK automotive sector produced less than one million cars in a calendar year was 1986.
Unfortunately, 2022 has seen only 511,106 units produced thus far, a 13.3% decline compared to January to August 2021.
In contrast, the 5-year pre-pandemic average for January to August output from 2014 – 2019 stands well above this mark at 1,030,527 units.
With car manufacturers tending to pass price rises on to consumers, demand was dampened by surging costs of semiconductors, logistics and raw materials.
The SMMT noted,
The sector is now on course to produce fewer than a million cars for the third consecutive year.
Ian Henry, managing director of AutoAnalysis concurred with the SMMT’s analysis,
It is expected that by the end of this year car production will reach 825,000, compared to 850,000 a year ago, but that’s 35% down on 2019 and a whopping 50% on the high figure of 2017.
Other than the obvious fact that the UK’s economic atmosphere is in hot water, the automotive industry (including component manufacturers) has been struggling to stave off the high energy costs of doing business.
In a survey, 69% of respondents flagged energy costs as a key concern. Estimates suggest that the sector’s collective energy expenditure has gone up by 33% in the last 12 months reaching over £300 million, forcing several operations to become unviable.
Although the government enacted measures to cap the price of energy and ease obstacles to additional production, Mike Hawes, the CEO of SMMT, said,
This is a short-term fix, however, and to avoid a cliff-edge in six months’ time, it must be backed by a full package of measures that will sustain the sector.
Due to the meteoric rise in costs across the automotive supply chain, 13% of respondents were cutting shifts, 9% chose to downsize their workforce and 41% postponed further investments.
Uncertainties around Brexit and the EU trade deal are yet to be resolved.
Moreover, the energy crisis is poised to get even more acute unless Russia withdraws from the conflict, or international leaders ease restrictions on Moscow. Last week, I discussed the evolving energy crisis here.
With global central banks expected to tighten till at least the end of the year, demand is likely to be squeezed further pressurizing British car manufacturers.
Electric vehicles made up 71% of car exports from the UK in August, but robust growth in the sector looks challenging in the near term, in the absence of widespread charging infrastructure, high electricity prices and globally low consumer confidence.
Although energy subsidies could provide some relief in the immediate future, the industry will remain in dire straits while investments stay low and the shortage in human capital persists, particularly amid the push for EVs.
Given the prevailing macroeconomic environment, and severe market backlash to Truss’s mini-budget (which I discussed in an earlier article), the sector is unlikely to turn the corner any time soon.
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Stocks Slide, Ugly Mood Returns As Traders Ask ‘Did Anything Change’
Stocks Slide, Ugly Mood Returns As Traders Ask ‘Did Anything Change’
The brief post-BOE euphoria has worn off, and risk-off sentiment returned…
The brief post-BOE euphoria has worn off, and risk-off sentiment returned to markets as concern about inflation and the global economy overshadowed the Bank of England’s desperate attempt to restore calm by restarting QE, exacerbated by more hawkish central bank talk and defiance by British PM Liz Truss's tax plan (which has been slammed from the IMF all the way to the White House). Treasuries resumed their slide with UK gilts, while US equity futures fell as European stocks extended a selloff that’s caused valuations to drop to their lowest since 2012. As of 730am, emini S&P futures slid 0.7% to 3704, recovering from losses as big as 1.5% earlier.
The dollar rose and Treasuries resumed their slump as investors focused on expectations the Federal Reserve will continue to deliver aggressive interest-rate hikes. The pound snapped a two-day gain and UK gilt yields rose as Prime Minister Liz Truss defended a giant package of unfunded tax cuts that sent markets into turmoil.
“Other than the dollar, there are not many assets that are trading constructively,” said Julia Raiskin, Asia-Pacific head of markets for Citigroup Inc. “The markets are very pessimistic. Investors are fairly on the sidelines.”
In premarket trading, US-listed Chinese stocks drop in premarket trading, following in the footsteps of Hong Kong- listed peers as the Hang Seng Tech Index erased almost all gains since a March nadir. Alibaba (BABA US) -3%, Nio (NIO US) -2.9%, Baidu (BIDU US) -2.4%, Pinduoduo (PDD US) -2.6%, JD.com (JD US) -2.4%. Bank stocks also slumped after snapping a six-day losing streak the day earlier. Here are other notable premarket movers:
- Coinbase falls 2.5% in premarket trading after Wells Fargo starts coverage at underweight, with operating results set to remain under pressure. Bakkt (BKKT US) and Riot Blockchain (RIOT US) are both initiated at equal-weight, with Riot declining 3% in premarket trading.
- Altus Power (AMPS US) slumped 16% in premarket trading after the company’s secondary offering priced at $11.50 per share, below Wednesday’s record close of $14.23.
- First Solar (FSLR US) gained 1.3% in premarket trading after Evercore ISI analyst Sean Morgan raised the recommendation to outperform from inline, saying the company is poised to benefit from the Inflation Reduction Act.
- Apple (AAPL US) shares were down 2.6% in premarket trading, set to extend Wednesday’s decline, as BofA Global Research cut the recommendation on the stock to neutral from buy.
European stocks bounced off session lows amid heightened risk-off mood. Euro Stoxx 50 slumped as much as 1.2%. Autos, retailers and real estate are the worst performing sectors as all slump. European miners rose after news that the London Metal Exchange is launching a discussion paper that marks the first step toward a potential ban on new supplies of Russian metal. Porsche AG rose as much as 5.2% as its shares started trading in Frankfurt after parent Volkswagen AG set the final listing price for the sports-car maker at the upper limit of its offer range. Here are some other notable European movers:
- Accor shares jumped as much as 8.1%, before paring gains, after the French hospitality company raised FY22 Ebitda guidance to a level which analysts said was above consensus estimates.
- Rational rose as much as 16% after the German kitchen appliances manufacturer raised its sales and Ebit guidance, citing improvements in the supply chain picture.
- Capricorn Energy shares rose as much as 8.9% to 261p amid a proposed merger with NewMed Energy that’s expected to deliver total value to Capricorn shareholders of 271 pence per share.
- H&M shares dropped as much as 7.2%, heading for the lowest close since September 2004, after it reported 3Q results that missed estimates and highlighted “very negative” market conditions.
- Next fell as much as 10% after the UK high street retailer cut its FY guidance, citing the cost of living crisis and saying the devaluation of the pound is set to prolong inflationary pressures.
- Colruyt shares plunged 24%, the most intraday on record, after it said the consolidated net result for FY22/23, ex. one-offs, is expected to decrease considerably compared with last year.
- Ubisoft shares fell after the video-game company pushed back its Skull & Bones title to March 2023 from November, despite maintaining FY guidance. Analysts say the decision raises concern.
- Wacker Chemie shares dropped as much as 7.8% after Stifel cut its price target, saying lower silicone and polysilicon prices hit sentiment.
- Hornbach shares dropped as much as 7% after it published its latest 2Q report. The home improvement retailer posted a worse-than expected Ebit decline y/y, Warburg said.
- European auto stocks fell and were among the worst performing subgroups on the wider market, with Volkswagen and its parent Porsche Automobil Holding SE leading declines.
European bond yields also rose as investors digested the latest inflation data and commentary from European Central Bank officials. Euro-area economic confidence dropped to the lowest since 2020.
Investors are contending with threats posed by discordant moves from central banks over the past few days, with Fed officials adamant on further monetary tightening, the BOE unveiling a £65 billion ($71 billion) plan to support government debt and authorities in Asia trying to prop up weakening currencies.
“The central bank is in a very difficult position right now,” Julie Biel, Kayne Anderson Rudnick portfolio manager and senior research analyst, said of the BOE in an interview with Bloomberg TV. “Everyone has been a little bit backed into a corner in seeing the volatility and market reaction.”
Former Bank of England Governor Mark Carney accused the UK government of “undercutting” the nation’s economic institutions, and said that its fiscal plans were to blame for the drop in the pound and bonds. Simon Wolfson, the boss of Next Plc and a Conservative peer, also appeared to blame the Tory government for a crash in the currency and a worsening outlook for UK inflation, which the company cited as it lowered guidance for sales and profits.
Separately, the European Commission announced an eighth package of sanctions that would include a price cap on Russia’s oil exports as Russia vowed to go ahead with the annexation of the parts of Ukraine that its troops currently control after UN-condemned votes, putting the Kremlin on a fresh collision course with the US and its allies.
Earlier in the session, Asian stocks pared earlier gains spurred by the Bank of England’s unlimited bond-buying plan, as sentiment again turned cautious with fears over a global recession. The MSCI Asia Pacific Index was up 0.2%, having earlier gained as much as 1.2%. Benchmarks in Australia and Japan outperformed, while South Korea’s market closed almost flat. Gauges in Hong Kong and China ended in the red with tech stocks sliding near the lowest since to a sector index was introduced in 2020. Hang Seng Tech Index Slides Toward Lowest Since 2020 Inception The key Asian equity benchmark slumped Wednesday to its lowest since April 2020 on concerns over the Federal Reserve’s ongoing rate hikes. While the the UK central bank’s intervention to avert a crash in the gilt market helped calm investor nerves briefly, few saw the rally as a signal for a full-fledged rebound.
“We remain very cautious on the markets and would exercise a degree of patience,” Kerry Craig, a global market strategist at JPMorgan Asset Management, said in an interview with Bloomberg TV. Central bank moves, inflation and “the looming risk of recession” need to be monitored, he said. Down almost 12% in September, the MSCI Asian benchmark is set to post its worst monthly performance since the pandemic-triggered crash in March 2020. An index of Asia Pacific stocks excluding Japan is on course for its fifth-straight quarterly loss, its longest losing streak in 21 years.
Japanese equities rose, rebounding along with global peers as investors assessed the Bank of England’s move to buy government bonds. More than 1,100 Topix stocks traded without rights to the next dividend. The Topix rose 0.7% to close at 1,868.80, while the Nikkei advanced 0.9% to 26,422.05. Out of 2,169 stocks in the Topix, 1,854 rose and 271 fell, while 44 were unchanged. “Though there is still a strong uncertainty in the US and UK markets over the rise in long-term interest rates, for now there is a sense of relief in the markets as government bond yields in the UK settled down due to the unlimited purchase plan,” said Tomo Kinoshita, a global market strategist at Invesco Asset Management.
In Australia, the S&P/ASX 200 index rose 1.4% to close at 6,555.00, boosted by gains in mining shares and banks. In New Zealand, the S&P/NZX 50 index rose 0.7% to 11,200.04
Stocks in India declined for a seventh straight day in the longest losing streak since February, tracking a selloff across global markets amid worries over possible recession. The S&P BSE Sensex gave up an advance of as much as 1% to end 0.3% lower at 56,409.96 in Mumbai. The NSE Nifty 50 Index slipped 0.2% as both indexes posted their longest stretch of declines in seven months. The key gauges have dropped more than 5% each this month and are on track to record their worst monthly performance since the pandemic led crash of March 2020. Ten of the 19 sector sub-indexes compiled by BSE Ltd. declined Thursday led by the utilities gauge which has lost 11% for the month, making it the worst sectoral performer.
In FX, the Bloomberg Dollar Spot Index first rose then fell, as Treasuries slumped to unwind some of the previous day’s swift rally. The euro fell as much as 1% to $0.9636, before paring losses. It’s significantly more costly to hedge against euro price swings compared to a week ago, as traders bet on wider ranges with risks skewed to the downside. The pound erased losses amid month-end flows, after earlier falling by as much 1.2% to $1.0763. UK bonds extended losses after Prime Minister Liz Truss defended her new government’s giant fiscal package of unfunded tax cuts, which have tipped markets into chaos. Commodity currencies led declines among G-10 peers. Onshore yuan eked out the first gain in nine days following a stern PBOC warning against “one-sided” speculation, but offshore yuan weakened 0.4%
In rates, Treasuries pared Wednesday’s gains with yields cheaper by up to 11bp across the 5-year tenor into early US session, with the belly’s underperformance helped by a large block sale in 5-year note futures. Treasury 10-year yields near highs of the day at around 3.83%, outperforming bunds and gilts by 3.5bp and 4.5bp in the sector; belly-led losses cheapens 2s5s30s Treasuries fly by 7bp on the day. Moves follow a more aggressive bear flattening move in gilts, wit front-end yields are cheaper by 20bp on the day. US session focus on GDP and Fed speakers throughout the day. Bunds, Italian bonds dropped and money markets raised ECB tightening bets after German state CPIs rose in September while euro-area economic confidence dropped to 93.7 in September, the lowest since 2020. UK 10-year bonds decline after Truss doubled down on her economic package;
In commodities, Brent rebounded from earlier lows, to trade near $89.50 following reports of OPEC+ considering production cuts. Spot gold falls roughly $12 to trade near $1,648/oz. Bitcoin is under modest pressure but lies within narrow ranges of less than USD 500 at present and well within recent parameters as such.
Looking to the day ahead now, and data releases include German CPI for September, Italian PPI for August, and UK mortgage approvals for August (the calm before the storm). We’ll also get the weekly initial jobless claims from the US, as well as the third estimate of Q2 GDP. From central banks, we’ll also hear from an array of speakers, including ECB Vice President de Guindos, and the ECB’s Simkus, Panetta, Centeno, Villeroy, Knot, Elderson, Rehn, Vasle, Kazaks, Muller and Lane. In addition, there’ll be remarks from the Fed’s Bullard, Mester and Daly, as well as BoE Deputy Governor Ramsden and the BoE’s Tenreyro.
- S&P 500 futures down 1.1% to 3,692.25
- MXAP up 0.2% to 139.97
- MXAPJ little changed at 453.71
- Nikkei up 0.9% to 26,422.05
- Topix up 0.7% to 1,868.80
- Hang Seng Index down 0.5% to 17,165.87
- Shanghai Composite down 0.1% to 3,041.21
- Sensex down 0.3% to 56,446.56
- Australia S&P/ASX 200 up 1.4% to 6,554.97
- Kospi little changed at 2,170.93
- STOXX Europe 600 down 1.6% to 383.23
- German 10Y yield little changed at 2.23%
- Euro down 0.9% to $0.9650
- Brent Futures down 1.2% to $88.23/bbl
- Brent Futures down 1.2% to $88.23/bbl
- Gold spot down 0.9% to $1,644.68
- U.S. Dollar Index up 0.92% to 113.64
Top Overnight News from Bloomberg
- Britain is in a self-inflicted financial crisis that threatens to accelerate the economy’s dive into recession -- and the country’s new prime minister is coming under intense pressure to blink
- The ECB should opt for a “big” increase in interest rates in October, according to Governing Council member Martins Kazaks, who said in an interview that subsequent hikes are likely to be smaller. His Baltic counterparts Gediminas Simkus and Madis Muller also indicated they’d back significant moves, while Mario Centeno of Portugal called for a “measured and balanced” approach
- The ECB must ensure pay pressures don’t get out of control in its efforts to keep expectations stable, according to Governing Council member Olli Rehn
- The Riksbank believes it is very important that monetary policy continues to act for inflation to fall back and stabilize at the target of 2% within a reasonable time perspective, the Swedish central bank says in minutes from its latest monetary policy meeting
- Japan’s capital markets suffered the biggest foreign outflow in three months last week as growing fears of a global downturn fueled a search for liquidity
- China’s economy stabilized in the current quarter, and the final three months of the year will be key to the nation’s economic recovery, Premier Li Keqiang said
- As doubts grow over whether Xi Jinping still prioritizes expanding China’s economy over other goals, he’s tipped to appoint a new economic adviser who’s vowed to put growth first
- OPEC+ has begun discussions about making an oil-output cut when it meets next week, a delegate said
A more detailed look at global markets courtesy of Newsquawk
Asia-Pacific stocks traded higher as the region took impetus from the rally on Wall St where risk sentiment was buoyed and yields retreated following the BoE's announcement to resume Gilt purchases. ASX 200 outperformed in which the commodity-related sectors led the broad advances across industries following the recent upside in energy and metal prices, while firm monthly CPI data did little to dent risk sentiment. Nikkei 225 was also positive but with gains initially capped as more than half of the stocks traded ex-dividend. Hang Seng and Shanghai Comp were also firmer with the Hong Kong benchmark spearheaded by tech and energy stocks, while the mainland also digested reports that the PBoC is setting up a more than CNY 200bln re-lending facility quota for equipment upgrades which aims to expand market demand in the manufacturing sector.
Top Asian News
- PBoC injected CNY 105bln via 7-day reverse repos with the rate kept at 2.00% and injects CNY 77bln via 14-day reverse repos with the rate kept at 2.15% for a CNY 180bln net injection.
- Chinese President Xi told Japanese PM Kishida that they attach great importance to the development of China-Japan relations and he is willing to work with Kishida to build relations, while Kishida told Xi that bilateral relations are currently facing many issues and challenges but he hopes to build constructive and stable relations to boost peace and prosperity, in messages to mark 50 years of diplomatic relations.
- Hong Kong’s Worst Trading Debut in 2022 Sends EV Maker Down 34%
- US’s Harris Goes to DMZ Hours After North Korea Missile Launch
- Japan’s First Bond to Help Ocean Planned by Major Seafood Firm
- Best HK IPO Quarter in Year Ends With Disaster Debut: ECM Watch
- Yuan Bears Bet China Is Powerless to Fight the Mighty Dollar
- China Vows to Speed Up Delayed Homes With Special Loans
European stocks are experiencing another bleak session thus far as the overnight gains in futures dissipated heading into the cash open. Sectors are in a sea of red with no clear theme. Autos kicked off the day as the outperformer as the Porsche AG IPO occurred at a premium to the guided price of EUR 82.50/shr. US equity futures are also trading with losses across the board, with relatively broad-based downside of 1.3-1.5% seen across the front-month contracts.
Top European News
- UK PM Truss says the fiscal statement (i.e. mini-Budget) is the correct plan.
- UK Chief Secretary to the Treasury says the growth plan will get the economy growing, one of the reasons growth plans included tax cuts was to alleviate the household burden. BoE intervention has had the desired effect. Disagrees with the IMF's remarks.
- US President Biden's administration was reportedly alarmed by the market turmoil caused by the UK's economic program and is seeking ways to encourage PM Truss's team to dial back its tax cuts, according to Bloomberg.
- France is reportedly considering proposals for up to two hour power cuts for parts of the country on a rotating basis, via Reuters sources; additionally, telecom names have highlighted power issues with the German and Swedish gov'ts.
- German Network Regulator says recent gas consumption by households is too high to remain sustainable, via Reuters; gas savings of 20% are required to avoid an emergency.
- German gov't could make a "low three-digit billion amount" available for the gas price break, discussion of EUR 150-200bln, via Handelsblatt citing gov't circles; will reportedly be announced today.
- Europe Gas Eases With Traders Weighing Impact of Pipeline Blasts
- Rational Jumps After Boosting Sales Guidance Above Consensus
- Truss Says UK Tax Cuts Are the ‘Right Plan’ Amid Market Rout
- German Economy Seen Shrinking Next Year Due to Energy Crisis
- Profligate Government to Blame for Pound Drop, Says Wolfson
- USD has regained some poise after a mid-week pullback; though, the DXY remains off earlier 113.79 highs and thus shy of the YTD/WTD peak at 114.78.
- Yuan has derived pronounced support from Reuters reports that China's state banks have been told to stock up for intervention offshore, sending USD/CNH to 7.1437 from circa. 7.20 pre-release.
- Cable managed to 'recover' to a test of 1.09 but failed to breach the level with multiple BoE speakers in focus later.
- EUR/USD moving at the whim of broader USD action and failing to glean any real traction from multiple speakers and German state/Spanish mainland CPI data.
- Core benchmarks are pressured across the board in a modest pullback of the pronounced BoE-induced 'recovery' seen yesterday, with numerous speakers due and the second BoE operation.
- Specifically, Bund lies towards the bottom of a 200 tick range while Gilts are holding onto the 95.00 handle with the associated yield lifting further above 4.0%.
- Stateside, USTs are similarly at the lower-end of parameters ahead of data and numerous speakers while the curve flattens further
- ECB's Simkus says his choice of hike for October is 75bp, says 50bp would be the minimum, via Bloomberg. A 100bp hike would be too much at this point.
- ECB's Centeno says decisions must be measured and balanced, still far from the neutral rate, via Bloomberg.
- ECB's Rehn says prospect of recession in Euro Area is likely.
- ECB's Vasle says current hike pace is "appropriate" response to inflation; expects to raise rates at the next several meetings.
- ECB's de Cos says so far there is no clear evidence of de-anchoring of inflation expectations. Based on current models, median terminal rate value is at 2.25-2.5% (significant uncertainty).
- ECB's Kazaks says 75bp will likely be appropriate for October, via Bloomberg.
- PBoC says they are to add more loans to ensure property delivery when required, via Reuters.
- China's state banks have reportedly been told to stock up for Yuan intervention offshore, according to Reuters sources, in a bid to defend the weakening Yuan.. State banks were asked to asked offshore branches, such as those in Hong Kong, New York and London, to review holding of the CNH to ensure dollar reserves are ready to be deployed.
- RBI likely selling USD via state-run banks around 81.92-81.93 levels, according to traders cited by Reuters
- NBH hikes one-week deposit rate by 125bp, to 13.00%.
- Turkish President Erdogan says interest rates need to come down further; CBRT needs to lower rates at the next meeting, via Reuters.
- Japanese Chief Cabinet Secretary Matsuno said North Korea's multiple missile launches are unacceptable and Japan will maintain close contact with allies including the US to monitor and deal with North Korea, according to Reuters.
- Turkish President Erdogan said Turkey will increase its military presence in northern Cyprus, according to Sky News Arabia.
- EU Official expects an agreement on the next Russian sanctions package, or at least major parts of this, before the EU Summit next week. Expects the discussion to focus on referendums, possible annexation, nuclear threat and Nord Stream.
- Russian State Duma representatives have received invitations to the Kremlin for Friday, September 30th at 13:00BST, via Ria.
- Russian Kremlin says the ceremony on incorporating new territories will occur on Friday, September 30th - President Putin will speak.
US Event Calendar
- 08:30: Sept. Initial Jobless Claims, est. 215,000, prior 213,000
- 08:30: Sept. Continuing Claims, est. 1.39m, prior 1.38m
- 08:30: 2Q GDP Annualized QoQ, est. -0.6%, prior -0.6%
- 08:30: 2Q PCE Core QoQ, est. 4.4%, prior 4.4%
- 08:30: 2Q Personal Consumption, est. 1.5%, prior 1.5%
- 08:30: 2Q GDP Price Index, est. 8.9%, prior 8.9%
Central Bank Speakers
- 09:30: Fed’s Bullard Discusses Economic Outlook
- 13:00: Fed’s Mester and ECB’s Lane Take Part in Policy Panel
- 16:45: Fed’s Mary Daly Speaks at Boise State University
DB's Jim Reid concludes the overnight wrap
How could you have earned a 42% return yesterday from a AA-rated investment? Simple. At anytime between 8-11am all you had to do was buy 40yr Gilts before the BoE effectively restarted QE only days before QT was suppose to start (it’s been postponed until October 31st - ironically Halloween). The buying operation is aimed at restoring liquidity to a broken long end market and is temporary but it’s another stunning development to a stunning year. I’ve always felt that this debt supercycle would end up with central banks doing QE even if interest rates were positive. The reason being is that the economy can be growing and seeing inflation at a point when investors baulk at funding all the debt. I appreciate this BoE operation is slightly different and I would have never have guessed the series of events that got us here but it might not be the last time a central bank buys government bonds when not at the zero bound given how much debt there is and how much there's likely to be going forward.
It's becoming clearer the extent to which Tuesday's rout at the long-end was exacerbated by collateral calls on LDIs (liability driven investments) that pension funds have typically used in some size in recent years. With these swaps moving so far out of the money, the risk was that investors would have to sell liquid assets to meet margin calls. If they didn't have this (which a lot don't), then obviously there would have been huge liquidity events. To understand the fears that were around over the last 48 hours, Sky News’ economics editor Ed Conway said yesterday that “I am told there were a swathe of pension funds that … would have essentially collapsed by this afternoon”. Whether that's true, we'll never know but it shows the level of fear.
Overall, this isn't quite monetising debt in the purest sense but at the end of the day we have seen fresh central bank buying of debt after unfunded tax cuts pushed up yields dramatically. Despite the BoE’s insistence that these are targeted, temporary purchases designed to ease market dysfunction, global pricing reacted as if they were launching a new QE program to ease financial conditions. Global equities increased, with the S&P 500 (+1.97%) breaking a run of 6 consecutive losses and global bond yields fell across the curve.
In yield terms, 30yr gilts had been trading above 5% prior to the BoE’s announcement, but afterwards they staged a stunning turnaround to fall by an astonishing -105.9bps yesterday. That was easily the largest decline in the 30 years of available Bloomberg data, with the next two closest being a -39.7bps and -30.5bps decline in 1997 and 2009, respectively. It was also the largest absolute daily yield move in the 30yr, with the next two closest being Monday and Tuesday’s sell-offs. The decline takes 30yrs back to 3.92%, which is still above the c.3.5% level prior to the fiscal announcement last Friday but more within normal market reaction levels. Yields on 10yr gilts were down by a smaller -49.8bps, although that reflected the BoE only purchasing gilts with a residual maturity of more than 20 years. Sterling also managed to strengthen for a second day running, with a +1.45% gain against the US Dollar. But that overall performance hides some incredible intraday swings, with sterling moving sharply higher immediately after the BoE’s announcement before tumbling by -2.74% over the subsequent hour and a half before paring back those losses once again. It is down -0.75% in Asia as I type. Remember that markets are still pricing in around +150bps worth of hikes by the next BoE meeting on November 3, and implied sterling-dollar volatility for the next month remains at levels we’ve only previously seen around the GFC, the Covid pandemic and Brexit in the 21st century, so we certainly haven’t heard the end of the UK’s turmoil just yet.
That intervention from the BoE helped sovereign bonds across the world. Indeed, yields on 10yr US Treasuries had been trading just above 4% immediately prior to the intervention, before reversing course to close -21.0bps lower on the day at 3.71%, which is their biggest move lower since the wild intraday swings we had in March 2020 when the Fed was stepping in to buy Treasuries and MBS in unlimited size; sound familiar? Those gains came as investors moved to downgrade the likelihood that the Fed would be pursuing aggressive policy into next year, with the rate priced in for December 2023 coming down by -23.3bps. This morning in Asia, yields on 10yr USTs (+3.6bps) have edged higher again to 3.77% as we type. In terms of the Fed, we did hear from Atlanta Fed President Bostic, who said he favoured another 125bps of hikes this year, but Chair Powell didn’t comment on policy in an appearance at a Community Banking Research Conference.
Over at the ECB, we heard from an array of speakers yesterday, including President Lagarde who said that the ECB would “continue hiking rates in the next several meetings”. Multiple speakers separately endorsed another 75bps hike next month as well, including Latvia’s Kazaks who said that “I would side with 75 basis points”, Austria’s Holzmann who said that “I think 75 would be a good guess”, and Slovakia’s Kazimir who said that 75bps was “a good candidate to continue and keep tightening.” However, sovereign bonds still rallied across the continent, with yields on 10yr bunds (-11.1bps), OATs (-11.8bps) and BTPs (-22.2bps) all down significantly.
When it came to equities, yesterday also finally brought a reprieve from the heavy selling over recent days, which had taken a number of major indices to their lowest levels since late-2020. As mentioned at the top, the S&P 500 (+1.97%) ended its run of 6 consecutive declines with a strong advance that took the index back into positive territory for the week. Despite the rally, the Vix managed to finish above 30 again, as it has every day this week. Indeed, the Vix has finished above 30 on nearly 19% of trading days this year, which is the fourth most in the last 20 years, behind just the crisis years of 2008, 2009, and 2020. The count hides how skewed the distribution is as in ten of those years, the Vix never once finished the trading day above 30. Yesterday's equity rally was less extreme in Europe, with the STOXX 600 (+0.30%), the DAX (+0.36%) and the FTSE 100 (+0.30%) seeing modest gains.
In Asia, the Hang Seng (+1.05%) is leading gains, rebounding from recent steep losses with the Kospi (+1.01%), the CSI (+0.50%), the Shanghai Composite (+0.24%) and the Nikkei (+0.25%) are trading higher. Stock futures in the US are pointing to a slightly more negative start though with contracts on the S&P 500 (-0.11%) and NASDAQ 100 (-0.22%) both in the red. As we go to print, the Swedish media is reporting that coast guards have found a fourth leak on the Nord Stream pipeline. What worries me is that if this can be done to this pipeline what stops it being done to a fully working pipeline.
Elsewhere, the People’s Bank of China (PBOC) stepped up its efforts to limit FX weakness by warning banks against betting on the yuan, after its rapid decline against the US dollar this week which pushed the Chinese currency to as high as 7.25 yesterday. Indeed, the US dollar index (+0.59%) at 113.27 is trending upwards this morning, after hitting a fresh two-decade peak yesterday before pulling back.
There wasn’t much in the way of data yesterday, although US pending home sales for August were down -2.0% (vs. -1.5% expected). With the exception of April 2020 during the lockdowns, that takes them to their lowest level in over a decade. In the meantime, the US goods trade deficit for August narrowed to $87.3bn (vs. $89.0bn expected), which is its smallest level since October 2021.
To the day ahead now, and data releases include German CPI for September, Italian PPI for August, and UK mortgage approvals for August (the calm before the storm). We’ll also get the weekly initial jobless claims from the US, as well as the third estimate of Q2 GDP. From central banks, we’ll also hear from an array of speakers, including ECB Vice President de Guindos, and the ECB’s Simkus, Panetta, Centeno, Villeroy, Knot, Elderson, Rehn, Vasle, Kazaks, Muller and Lane. In addition, there’ll be remarks from the Fed’s Bullard, Mester and Daly, as well as BoE Deputy Governor Ramsden and the BoE’s Tenreyro.
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