Clear-out in rates as ECB expectations shift to 75bp, USD/JPY nears 140
OVERNIGHT NEWS
# Clear-out in Euro govies continues, speculation shifts to 75bp ECB hike next week after above-forecast core CPI for August. Higher prices of non-industrial goods and services fuels concerns over de-anchoring. 10y Bund yield nears 1.60%, target late June high of 1.669%.
# JPY slumps to 24-year low of 139.68/USD after UST 2y yield scales 3.50% for the first time since 2007, 10y UST climbs to 3.22%.
# Day ahead: ECB speaker Centeno and Fed’s Bostic. US ISM manufacturing, initial jobless claims. UK, France and Spain benchmark auctions. Hungary CB to lift one-week depo rate by 100bp to 11.75%, in line with base rate.
# China Caixin manufacturing PMI returns to contraction zone, falls to 49.5 in August from 50.4 in July. USD/CNY +0.25% at 6.9075.
# South Korea 2Q GDP expands 0.7% qoq, 2.9% yoy. August trade deficit widens to record $9.47bn on weaker won and higher energy prices. USD/KRW +1.1% at 1,355.
# Switzerland CPI edges up to 3.5% yoy in August from 3.4% in July, above forecast. Core rate steady at 2.0%.
# Nikkei -1.5%, EUR 10y IRS +4bp at 2.46%, Brent crude -0.7% at $95.0/b, Gold -0.4% at $1,704/oz.
September seasonality bullish USD, bearish fixed income (higher yields)
A September to remember
A new month is underway and it’s going to be a September to remember. Risk sentiment is on the backfoot amid Asia growth concerns and still rising central bank expectations. The Chinese city of Chengdu has gone into lockdown, a city of 21mn residents and the biggest city since Shanghai’s lockdown a few months back. Coupled with weak Caixin manufacturing PMI and disappointing data in South Korea and Taiwan, the Asia economic outlook remains challenging. Commodity prices are lower, as are equities. USDJPY breached 139.50 overnight given the move in US yields, with the curve steepening overnight. USDCNH holds relatively well thanks to a Bloomberg report around Russia FX reserves and as we wait for trade data.
Data is going to be a focus for the remainder of the week, and not just in the US. Overnight, we highlight Germany manufacturing PMI being revised lower, while CHF CPI came in slightly higher than forecast in headline. In the US, we don’t think Fedspeak presents headline risk with just Bostic scheduled in the afternoon. Instead, after a miss in ADP on Wednesday and as we wait for NFP on Friday, our economists warn of softer data prints today. Weekly jobless claims are likely to rise at 08:30 EDT, but our focus is on ISM manufacturing at 10:00. Citi Economics is below consensus estimates for 51.9, warning that we may only print 50.8 for August, with some components potentially in contractionary territory. Elsewhere, BRL awaits Q2 GDP and August trade balance.
Latin America:
Latam currencies remained under pressure throughout the session, as overall risk appetite remained subdued amid relatively uneventful local headlines. BRL and CLP were the laggards, depreciating 1.5% and 1.1%, respectively. In contrast, MXN was the outlier in the region, with a 0.1% gain. The price action in rates was relatively more favorable, with small rallies (2-5bp) across most curves. The front end and belly of the CLPxCAM curve stood out as the best performing tenors in the region, as the market continued to reduce expectations for the BCCh’s hiking cycle; 1y CLPxCAM closed 15bp lower, at 11.13%.
initial proposal to congress to raise taxes by 1.8% of GDP.
President Gustavo Petro had initially called for tax increases
equivalent to about 5% of GDP, while the government
requested a 0.8% increase in the 2023 budget.
