The day of judgment will come sooner or later
You know something is wrong when stocks and bonds sell at the same rate. The simple answer is the fear that structurally higher inflation will weigh on growth – “both through consumption and possibly through investment -” as central banks are ultimately forced to tighten the screw on monetary policy. despite the nature of the inflationary shock (on the supply side). End result: stagflation. Add some nervousness over the US debt ceiling debate (U.S. Treasury Secretary Yellen warns of the default October 18 deadline) and US stock markets end the day down 1.6% (Dow) to 2.8% (Nasdaq). The main European indices also lost around 2.5%. Technical images show more and more cracks in the downward buying pattern, with the rest of the week serving as a real test. The US yield curve steepened with yields rising from 2.4 bps (2 years) to 9.2 bps (30 years). Details shown real rates (Fed action expected) and inflation expectations add to the movements. The US 10-year yield closed above the 1.53% retracement (62% retracement on the March / July decline) with the US 30-year yield moving out of the 1.8% trading range at 2.05% in place since July. The very weak US consumer confidence coincided with intraday lows in the core bond markets. The US Treasury closed its month-end refinancing operation with a disappointing sale of $ 62 billion in 7-year notes. The auction coverage was close to the recent average, but the auction ended almost a full bp above the 1:00 p.m. bid side. German rates gained 0.1bp (2yr) to 2.3bp (10yr) from a daily perspective. The hike in European rates remains the only one to contribute to the rise in inflation expectationss with several market gauges almost 2% for the first time in many years. The ECB, for its part, continues to deny the inconvenient truth, but the day of reckoning will come sooner or later. ECB Guindos and Lane’s good moves are expected to speak out at the ECB forum today and serve as a wild card for trading. After the European closure, the forum offers a round table with the president of the G4 central bank. Overall, the same trading momentum as at the start of this week will remain in play. Asian stock markets are no exception this morning. Ecological data is limited to EC economic confidence data.
The dollar’s performance against the euro was revealing. EUR / USD closed at 1.1683 vs. 1.1695 open without really testing the YTD low at 1.1664 EUR / USD despite very fertile USD trading conditions ((real) divergence in rates, risk aversion). The jury is still out, but it tentatively backs our thesis that enough positive USD news is being factored in, with investors knowing that the moment of euro clarity will come once the ECB embraces the global normalization movement. The real rate argument initiated in USD / JPY which tested post-Covid high at 111.66. The British pound suffered the same fate as less liquid and smaller currencies with EUR / GBP (0.8631) closing at its highest since mid-July.
According to a draft budget, the Polish government aims to reduce the budget deficit for 2022 to 2.9% of GDP, as strong economic growth and better tax collection should improve public finances. Budget forecasts assume economic growth of 4.6% in 2022 against 4.9% expected this year. Public debt, as measured using the EU general government debt methodology, is expected to be 56.6% of GDP in 2022 and is expected to decline further by 52.9% by the end of 2025. Yesterday, The Standard and Poor’s rating agency has slightly lowered its forecast for Polish growth next year from 5.4% to 5.3%. According to S&P, private consumption, supported by a strong labor market and flexible fiscal policy, will continue to support economic growth. On the foreign exchange markets, yesterday the Polish zloty was a major victim of rising base yields and risk aversion sentiment. The EUR / PLN surged from the Standard and Poor’s rating agency which slightly downgraded its forecast for Polish growth next year from 5.4% to 5.3% 4.ub 4.60 to 4.63.
US consumer confidence in September (Conference Board) as published yesterday fell to the lowest level since February (109.3 vs. 115.2). The decline was due to both the assessment of current conditions (143.4 vs. 148.9) and the expectations component (86.6 vs. 92.8). Consensus estimates were for a virtual stabilization. The decline was rather generalized across the various subcategory measures of the survey. Among others, also the balance of the labor market (abundant jobs – difficult to obtain jobs) fell from 44.4 to 42.5.
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