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MNI US OPEN: Markets re-price ECB hike expectations

EXECUTIVE SUMMARY:

  • Greenback Consolidates Overnight Gains
  • EGBs underperform as markets re-price ECB hike expectations

NEWS

ECB: Various ECB Officials Comment On September Meeting/Discussions
The European Central Bank (ECB) needs another significant interest rate hike in September and should hit the "neutral" level before the end of the year, French central bank chief Francois Villeroy de Galhau said on Saturday. Additionally, Executive Board member Isabel Schnabel urged policy makers to act forcefully to bring stubbornly high inflation back under control and warned against retreating at the first sign that price pressures may ease. The comments add to ECB Holzmann’s who said a 75bp hike should be part of the debate on Friday.

ECB (BBG): Governing Council member Martins Kazaks said the ECB needs to act forcefully and raise interest rates by at least a half-point next month to bring inflation back under control.

FED (MNI): The Federal Reserve’s next round of economic projections in September are likely to show more persistent inflation and higher unemployment to reflect the greater pain that will result from the central bank’s aggressive monetary tightening campaign, former NY Fed President William Dudley told MNI, late Friday.


  • “This is a different message about how we have to be restrictive and we’re going to need to be restrictive for some time and there’s going to be some pain and the unemployment rate is going to have to go up,” Dudley said. “The interesting thing is will you be able to see this in the Summary of Economic Projections for September because the June projections were still quite optimistic.”
  • Fed Chair Powell delivered a strong and succinct message at this year’s Jackson Hole conference: interest rates will have to rise to restrictive levels and then stay there for longer. Markets reacted swiftly, with the Dow Jones industrial average diving 1,000 points with two-year bond yields rising to 3.4%, the highest level since June and edging closer to highs not seen since the global financial crisis of 2008.

U.K.: (Reuters) Truss Considers 5% Cut In VAT
British leadership frontrunner Liz Truss is considering cutting value-added tax (VAT) by 5% across the board to help tackle the cost-of-living crisis if she succeeds Boris Johnson as prime minister next month, the Sunday Telegraph reported. Truss's leadership campaign is considering the plan as a "nuclear" option, the Telegraph quoted an unnamed source as saying, with other options including a 2.5% cut in the VAT sales tax, from the current standard rate of 20%.

Ukraine: Zaporizhzhia Situation “Remains Very Risky”, IAEA To Inspect Plant
Ukrainian President Volodymyr Zelenskiy has said the situation at the Zaporizhzhia nuclear plant “remains very risky”, even after two power units were reconnected to the country’s energy grid following an outage. The plant is working “despite provocations by occupying Russian forces,” state-owned operator Energoatom said.

  • International Atomic Energy Agency Director General Rafael Mariano Grossi will lead inspection of the Russian-occupied Zaporizhzhia Nuclear Power Plant later this week, according to statement on Twitter.
Iran (BBG): Nuclear Deal Meaningless Unless IAEA Probe Resolved
Nuclear deal between Iran and world powers “would be meaningless without a resolution of safeguards issues,” Iranian President Ebrahim Raisi said in a press conference, referring to investigation by UN nuclear agency IAEA.

China: Regulators are likely to move to correct any deviation of the yuan, if there is a pro-cyclical herd effect or currency overshooting risks in the market, wrote Guan Tao, former forex official and now chief economist of BOC Securities in a blog post. Find the full MNI China press digest here.

SWEDEN DATA: GDP lower than expected but upward revisions to prior data

  • GDP lower than expected: On a Q/Q basis 0.9% growth in Q2 (1.4% expected) but there was a big upward revision to Q1 from -0.8% to +0.2%. There was also a 0.2ppt upward revision to Q4-21 and downward revisions to Q1-21 and Q3-21. On a Y/Y basis 3.8% this equates to vs the 4.2% survey number.
  • In terms of the breakdown consumption rose 1.6%Q/Q, gross fixed capital formation 3.3% (of which "The main contribution to the increase came from investments in buildings and structures as well as in intellectual property products."), while net exports were -0.5%, government consumption -0.3% and inventories unchanged.
  • This will probably not do much to change the Riksbank's policy decision at next month's meeting with the market expecting the debate to be between a 50bp or a 75bp hike due to much higher than forecast inflation.
  • So overall the details look better than the headline numbers would suggest.- EURSEK moved a little higher on the release (10.65 to 10.656) but is now slightly below its prevailing levels ahead of the data at 10.463.

BONDS: EGBs underperform as the markets re-price ECB expectations

Core fixed income has been under pressure this morning with EGBs underperforming Treasuries as the market continues to price in a greater likelihood of larger hikes by the ECB following a Reuters sources story released on Friday afternoon (as well as Powell's hawkish Jackson Hole comments).

  • The German curve has moved in a relatively parallel move, with Schatz and 10y Bund yields up around 13bp on the day. Peripheral spreads have barely moved today in spite of the ECB re-pricing.
  • TY1 futures are down -0-20+ today at 116-30 with 10y UST yields up 7.4bp at 3.117% and 2y yields up 6.8bp at 3.468%.
  • Bund futures are down -1.73 today at 148.23 with 10y Bund yields up 13.1bp at 1.517% and Schatz yields up 13.1bp at 1.099%.
  • BTP futures are down -1.48 today at 120.02 with 10y yields up 14.0bp at 3.831% and 2y yields up 17.7bp at 2.084%.

FOREX: A busy start for the week

  • It's all about the Dollar, with the currency once again in the green across the board, against all the majors.
  • Price action has been a continuation from the Hawkish Fed Powell on Friday, pushing Yield higher, and Equities lower.
  • The Greenback leads against the Yen, but the pair is off its best level at the time of typing.
  • Yen is the worst performer across the board, but USDJPY failed to break 139.00, printed a 139.00 high, and now trading at 138.61 at the time of typing.
  • The EUR is fairing better, still holding above 0.9900 in EURUSD, printed a 0.9914 low.
  • Overall the EUR is up against all G10, besides the USD (down 0.12%).
  • The Pound is in the red in G10s on a UK bank holiday weekend, flat versus the Yen, and Cable continues to drift to its lowest level since 25/03/20.
  • Next support in GBPUSD will be seen at 1.1600 (round number), so far printed a 1.1649 low this morning.
  • Looking ahead, there's no tier 1 data for today, but it is a packed week for data this week, starting as of tomorrow and ending with US NFP and AHE on Friday.
  • Speakers for today, includes ECB Lane and Fed Brainard.

COMMODITIES LEVELS UPDATE: European natgas leading lower as storage fills up faster

  • WTI Crude up $0.07 or +0.08% at $93.29
  • Natural Gas (NYM) up $0.26 or +2.83% at $9.559
  • Natural Gas (ICE Dutch TTF) down $44.4 or -13.09% at $305.475
  • Gold spot down $15.65 or -0.9% at $1722.3
  • Copper down $12.7 or -3.44% at $357.3
  • Silver down $0.32 or -1.7% at $18.5778
  • Platinum down $13.42 or -1.55% at $855.02

EQUITIES LEVELS UPDATE: Lower led by Europe

  • Japan's NIKKEI down 762.42 pts or -2.66% at 27878.96 and the TOPIX down 35.49 pts or -1.79% at 1944.1.
  • China's SHANGHAI closed up 4.505 pts or +0.14% at 3240.728 and the HANG SENG ended 146.82 pts lower or -0.73% at 20023.22.
  • German Dax down 196.42 pts or -1.51% at 12779.77, FTSE 100 down pts or at , CAC 40 down 95.53 pts or -1.52% at 6180.78 and Euro Stoxx 50 down 60.28 pts or -1.67% at 3544.54.
  • Dow Jones mini down 214 pts or -0.66% at 32055, S&P 500 mini down 39.75 pts or -0.98% at 4021.25, NASDAQ mini down 162.5 pts or -1.29% at 12464.25.


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