Market players today

Tuesday marks another bright day in terms of economic data releases. August retail sales will be released for Sweden and Norway, while the Richmond Fed’s manufacturing index is expected to be released in the United States.

The ECB’s Annual Forum begins today, and while the agenda will not focus on the short-term monetary policy outlook, markets will follow Lagarde’s opening speech at 2:00 p.m. CET. A number of Fed speakers are also on the leads in the evening.

The 60-second preview

US yields jump: US Treasuries came under further pressure yesterday. Ten-year yields hit 1.51% and five-year yields traded as high as 0.99%, the highest level since February 2020. Fixed income sales picked up last week as the Fed pointed to a cut later this year as the Bank of England opened the door to first rate hikes and as the Norges Bank raised its policy rate as the first central bank in the G10.

The surge in 5-year UST rates preceded the 2 and 5-year Treasury bill auctions. They were both well received, but only after the yields rebounded before the auction. It appears that investors are now demanding a higher yield to absorb the high supply as we approach the start of the reduction later this year.

The market is also focusing a lot on whether the sharp rise in yields has triggered or will trigger convexity hedging (selling US Treasuries to extend portfolio duration) as the duration of the mortgage market grows longer. as refinancing by borrowers slows down. This hedging dynamic can exaggerate any upward movement in yields.

Finally, inflation expectations (breakeven points) have also risen, with Brent surpassing USD 80 per barrel. Overall, it appears that the market is no longer fully embracing the Fed’s rhetoric that high inflation is “temporary”. For more on the outlook for European and US yields, see Yield Outlook which we published on September 21. We have a 2022 target of 2% for 10-year US Treasury yields.

Oil: Brent oil is trading above $ 80 a barrel this morning as the shortage of natural gas spreads across the world, triggering the use of oil as an alternative for power generation. This “natural gas demand effect” is occurring simultaneously with the economic recovery, and increased air traffic is stimulating demand and depleting global crude oil inventories. Note that later today, OPEC will release its World Oil Outlook. The outlook comes ahead of the OPEC + meeting next week. There are growing fears that the cartel is reluctant or even unable to increase production enough to prevent oil spikes, as demand peaks during the winter season in the Northern Hemisphere.

Debt ceiling: The vote in Congress on the bill to extend the US debt limit until December of next year was not passed last night because Republicans rejected it. The rejection comes as the government shutdown deadline approaches Friday. Log-rolling will continue in the coming days, but a government shutdown cannot be ruled out. Yesterday, the Fed’s John Williams warned of catastrophic consequences if the United States defaults on its public debt and investors could become “extremely nervous”, which could lead to “extreme” market reactions.

Fed resignation: Boston and Dallas Fed branch presidents Rosengren and Kaplan rushed in yesterday after it was revealed earlier this month that they had been involved in controversial personal business activities during the height of the pandemic last year. It leaves no less than six seats to be filled in the coming months.

Powell: Fed Chairman Powell will repeat in testimony to Congress today (released yesterday) his message from last week that inflation should be high for months, but then moderate. Expect a lot of questions about the inflation outlook after the testimony.

Actions: Global stocks traded lower yesterday, but with huge regional and sector differences. Cyclical value trading continues to perform as investors see higher returns reducing the value of future cash flows, but they don’t see returns as a constraint on the economic environment or stocks in general. We need to see a sharper rise in yields of over 50bp before it has a significant impact on risk appetite. Additionally, before yields become a challenge for the TINA argument, we need to see at least the long end rise by 100bp or more from the current level. For now, the energy sector is benefiting from rising oil prices while banks are the biggest beneficiaries of the higher returns. Healthcare and technology are the biggest losers in today’s environment. In the United States yesterday, Dow + 0.2%, S&P 500 -0.3%, Nasdaq -0.5% and Russell 2000 + 1.5%. Asian stocks are mixed this morning. Hang Seng outperforms as real estate developers rally over reassuring comments from lead developer Sunac. US and European futures are stable.

FI: Global bond yields continue to rise and US 10-year government bond yields are testing the 1.5% level following more aggressive comments from Federal Reserve officials. Thus, the US 2-10Y yield curve steepens but the 10Y-30Y curve continues to flatten. We are seeing a similar development on the German and EUR swap curves. In addition, ASW Bund spreads have been remarkably stable over the past few weeks despite rising yields and the series of new syndicated deals and the supply of EGB, financial and corporate bonds during the month of September. .

FX: The start of the week was fairly calm for the forex markets. EUR / USD remains little changed as oil exporting currencies have been the big winners in the major currency space. That said, the NOK underperformed on a relative oil-FX basis, with EUR / NOK erasing losses from early Monday. EUR / SEK was one of the best performing crosses and is now trading near the 10.20 threshold.

Credit: Credit markets saw only small moves yesterday, where the low beta segment outperformed the high beta. iTraxx Xover widened slightly to 242bp while Main tightened 0.2bp to 48.9bp. HY bonds closed 1bp wider and IG remained unchanged.