Market movers today
A quiet day on the data front, with only US Philadelphia manufacturing index and weekly jobless claims due for release.
Fed chair Powell will discuss economic outlook at the Economic Club of New York this evening at 18:00 CET. With the FOMC’s blackout period starting on Saturday, this will be a key opportunity to guide the market ahead of the November meeting. That said, market is already well priced for the Fed to remain on hold while keeping the door open for a final hike in December or January.
Other Fed speakers on the wires today include Jefferson, Goolsbee, Barr and Bostic.
People’s Bank of China will likely maintain Loan Prime Rates unchanged overnight in line with the unchanged medium-term lending facility rate earlier this week.
The 60 second overview
Israel-Gaza conflict: Joe Biden visited Israel yesterday, with one key focus area being ensuring humanitarian aid to civilians in Gaza. Biden also discussed the issue in a phone call with Egyptian president Abdel Fattah El-Sisi who agreed to allow around 20 trucks of daily aid into Gaza via the Rafah crossing, which is the sole non-Israeli entry and exit point to the area. Earlier this week, Biden administration was reported to be preparing a USD100bn supplemental funding package to cover aid to both Israel and Ukraine as well as several domestic US issues. However, while such package would likely pass the democratic-controlled Senate, the House of Representatives is still unable to vote on any new bills, as it has not been able to elect a new speaker after ousting Kevin McCarthy. The current nominee Jim Jordan was rejected for the second time in a vote last night. And even if a new speaker was found, it remains unclear if especially the more hardliner republicans (who Jordan represents) would support a package linking Israel support to additional funding for Ukraine, even if the former has fairly broad-based support across Congress.
Fedspeak: Overall, market sentiment remained sour yesterday, with equity markets falling, 10y UST yield soon approaching 5% and broad USD strengthening. The most recent Fed speakers, including Waller and Harker yesterday, have communicated that the Fed has room to continue monitoring effects of past tightening by extending the September pause into November. But markets still price in an additional 14bp of tightening for the December and January meetings. NY Fed’s Williams commented that he is ‘not convinced yet neutral rate has risen’ which would suggest that monetary policy is already clearly restrictive. One area where the impact is very visible is the housing market, as the MBS index of new mortgage applications for purchase has declined to the lowest level since 1995 amid 30y mortgage rate hitting 8% yesterday. That said, most of the September hard macro data still managed to surprise to the upside, which we discussed yesterday in our latest US Labour Market Monitor, 18 October.
Equities: Risk-off resurfaced on Wednesday. S&P -1.3%, Stoxx 600 -1.1% and small cap Russell 2000 a full -2.1% lower, taking the indices lower for the week. The negative trigger was yields, rising to a new year-high. It was not a growth-to-value rotation though but a cyclical sell-off. Materials (also driven by weak Chinese housing data) sold off with Boliden and SSAB down 4-6%. Note that the sell-off came despite unchanged industrial metal prices. Industrials and consumer discretionary also underperforming, losing -2-3%. US futures are continuing lower this morning.
FI: The upward surprise in UK inflation data drove GILT yields markedly higher yesterday with contagion effects on global bond markets. The 10Y GILT yield ended the day 15bp higher, while the 10Y Bund yield rose 4bp. Curves bear steepened across markets. BTP-Bund spreads widened ahead of S&P reviewing Italy on Friday, probably partly reflecting some uncertainty on how the Meloni government’s proposal of fiscal easing worth an estimated EUR24bn next year could affect the credit assessment.
FX: Higher US yields, eroding risk appetite and rebalancing needs hit smaller currencies such the SEK and NOK. EUR/SEK and EUR/NOK escaped the recent range on the topside while both USD/SEK and USD/NOK moved back above 11.00. EUR/USD was relatively stable yet with a slight favour of the USD leg. USD/JPY still has its eyes on 150. EUR/GBP fell after the high inflation numbers, GBP gains proved transitory. CHF benefits from its safe-haven status as EUR/CHF pushes toward ATLs.
Credit: Yesterday, the negative sentiment in equity markets drove credit spreads wider, iTraxx Xover was 10.2bp wider at 455.2bp while iTraxx Main was 2.2bp wider at 85.7bp. That said, the primary credit market was active but the amount of deal activity was observed as limited. In the Nordic space, H&M printed a EUR500m 8Y green bond at MS+150bs. The books were above EUR3bn and IPT was at MS+165-170bp, these conditions indicate healthy investor appetite for selected names despite an increase in volatility, higher rates and lower indices.
