ECB inflation debates intensify
Market players today
- Today we have some market movers in the afternoon.
- First, we get jobless claims in the United States, where we’ll likely see a further drop below 350,000.
- In Denmark we get foreign exchange reserves from August and we expect an increase, but not due to intervention (see more below).
The 60-second preview
ECB: Further comments from ECB members were released yesterday. Bundesbank President Weidmann reflected the hawkish comments of Knot and Holzmann and warned that the ECB should not ignore the risk that inflation could accelerate faster than currently expected. In contrast, the Governor of the Bank of Greece, Stournaras, retorted that the ECB should not overinterpret the current spike in inflation, an opinion echoed later in the day by the Slovenian Vasle. While inflation is expected to exceed the ECB’s new symmetrical 2% inflation target for the rest of the year, hawks in the ECB’s Governing Council have spoken more about pro-inflationary risks and the need to slow down bond purchases. This sets the stage for some interesting discussions at the ECB’s meeting next week. That said, we expect the big debate on the future of the PEPP program to take place only at the December meeting.
Employment: While European manufacturing employment continued to rise in August, US employment indicators disappointed yesterday, with the ISM manufacturing employment index returning to contraction territory and the employment report of the private sector ADP indicating only 374,000 jobs created in August (against 638,000 expected). That leaves downside risks for tomorrow’s non-farm payroll report, which will be crucial to the Fed’s debt reduction plans. EUR / USD rose, while 10-year US Treasury yields fell below 1.30%.
Oil: OPEC + has agreed to continue its existing plan to gradually increase oil supply, ministers having ratified the 400,000 barrels per day production hike scheduled for October. Oil price increases have been a major driver of global inflation this year, but despite the expected increase in supply, oil prices were little changed when the announcement was made with Brent remaining broadly stable at 71.3 USD / bbl.
Stocks: Stocks started September on a positive note with gains in most regions and most sectors. Energy and materials are the only sectors down as metals and oil prices fell yesterday. Growth and small-cap stocks outperformed, with the equity sweet spot further supported by macro data yesterday. Asian stocks mixed this morning as China on the one hand continues to crack down on big tech while the PBOC on the other has softened a bit by making more low-cost finance available to SMEs. . European and US futures are slightly lower this morning.
FI: The recent rate hike paused yesterday, pending the US labor market report tomorrow. In addition, the spreads between the heart of the EU and the periphery tightened by a few bps yesterday. Germany sold 5.5 billion euros in a new 30-year benchmark at a very tight price, where investors paid 1bp to fair value and with a bid-to-cover above 3.
FX: Yesterday brought another session with modest losses for the greenback as commodity and industrial sensitive currencies gained. The impact on the terms of trade of rising metal prices has hit the JPY somewhat in recent sessions and EUR / CHF has also risen slightly this week. EUR / NOK is now testing 10.30 while EUR / SEK is hovering below 10.20.
Credit: CDS indices continued to outperform cash bonds yesterday with iTraxx Xover tightening 2bp to 226bp (thus hitting the post-pandemic low) and Main tightening by 0.3bp ( at 44.5 bp). HY bonds closed unchanged and IG saw a slight widening of around ½bp.
Danmarks Nationalbank is expected to release foreign exchange reserves figures for August today. There are several issues to watch out for this time. The foreign exchange reserve is likely to increase significantly after Danmarks Nationalbank was allocated DKK 29 billion in August in IMF special drawing rights. At the same time, public finances developed a little better than expected in August, so the debt management office may well have decided to further reduce the issuance of commercial papers by around DKK 40 billion. in July. It would pull in the opposite direction. Finally, the Danmarks Nationalbank could have stepped in to buy additional foreign currency in August, which would increase foreign exchange reserves. That being said, the Danish krone has traded a bit weaker against the euro over the past month, so it’s more likely that the Danmarks Nationalbank has taken a hiatus after stepping in every month since February.