MNI US MARKETS ANALYSIS - ECB Decision, Fed Chair In Sight

MNI ECB Preview - September 2022: Hiking By Less Than 75bp Could Be Risky For The ECB

Hiking By Less Than 75bp Could Be Risky For The ECB

• It is a close call, but we expect the ECB to hike by 75bp at the September meeting.
• With inflation getting closer to double digits and the ECB already well behind it peers, hiking by ‘only’ 50bp could risk undermining the perceived commitment to restoring price stability.

Despite dropping forward guidance given the current heightened degree of uncertainty, the ECB’s position on the policy rate path is relatively clear. There has been a notably hawkish shift since the July meeting, hiking in 25bp increments is no longer being discussed and the terminal rate is likely to be in the 1-2% range. So, we know that the ECB is in tightening mode and we have a reasonable idea of where the GC would like to get to (in the first instance). The two substantial unknowns are the pace of tightening and whether or not the ECB would continue hiking into a recession.

As others have commented, the September decision is finely balanced, but we come down on the side of a 75bp move. Inflation continues surprising higher, European gas prices have soared, the Fed has set a precedent by recently hiking in 75bp increments, and the window of opportunity to frontload rates in the euro area is narrowing.

For the full publication please see:

ECB Preview September 2022.pdf

US TSYS: Modest Twist Flattening Ahead Of ECB, Powell

• Cash Tsys sit with a mild twist flattening (with only 2s slight cheaper) as they take stock ahead of the upcoming ECB decision and then Powell’s participation at a Monetary Policy Conference. A series of swings since Friday’s payrolls on fluctuating inflation and growth pressures has seen 2Y yields range from 3.38-3.515% over that period, with the current 3.43% at the lower end after yesterday’s latest rally as oil slid on softer demand fears.
• 2YY +0.4bps at 3.435%, 5YY -2.2bps at 3.336%, 10YY -2.5bps at 3.239%, 30YY -1.8bps at 3.393%.
• TYZ2 trades 6 ticks higher at 116-11+ although remains vulnerable to the downside from a technical perspective having breached the bear trigger at 115-23, with support seen at 115-13+ (Sep 7 low). To the upside, initial firm resistance is eyed at 116-26 (Sep 2 high).
• Fedspeak: Powell takes part in moderated Q&A (0910ET), followed by Evans (’23) and Kashkari (’23) later on.
• Data: Consumer credit late on plus weekly jobless claims outside of a payrolls reference week.
• Bill issuance: $50B 4-W and $45B 8-W bill auctions (1130ET).

JAPAN: Kanda's Currency Missive Provides Little New Over June Statement

• Japan's vice finance minister makes comments to press following the FSA/MOF/BOJ meeting that took place this morning.
• To compare these Kanda comments with his statement that following the last FSA/BOJ/MOF meeting in June (which ended in no intervention) - very little change in language here, justifying the very short-lived JPY strength. USD/JPY back toward Y144 at typing.

June -

• Current excessive moves aren't aligned with fundamentals
• Appropriate responses include a wide variety of options
• Concerned about sudden moves in the yen
• Will monitor impact on economy with further closeness

September -

• Stance remains the same as last statement
• Highly concerned about recent moves
• Won't rule out any options if fx moves continue
• Fundamentals alone can’t justify recent yen move

STIR FUTURES: Sept FOMC Pricing Back >70bps Pre ECB, Powell

• The Fed Funds implied hike for the Sept FOMC has continued the uptrend of the past two days to sit at 70.5bps. It’s potentially spillover from Goldman’s view change late yesterday for a 75bp hike (from 50) and then 50bp in Nov (from 25), but remains within yesterday’s range after the snap reaction higher to Timiraos’s article - see chart.
• No change further out the curve though, with the terminal 3.90% for Mar’23 still down from yesterday’s early highs of 3.96% before 3.51% in Dec’23, with subdued Beige Book growth implications potentially still weighing.
• ECB presser and Powell to overlap with Powell at 0910ET, followed by Evans (’23) and Kashkari (’23) later on, with comments increasingly carrying more weight heading towards 2023.

FOMC-dated Fed Funds implied hike for Sep FOMC (white) then implied rates further out (bottom panel)Source: Bloomberg

UK: PM Announces Cap On Energy Bills @ GBP2,500/Year For Two Years

PM Liz Truss announcing gov't support for households and businesses on energy prices.

• Livestream: https://www.parliamentlive.tv/Event/Index/acb2b28e...
• New 'energy price guarantee' caps bills at £2,500 a year for two years, comes into effect from October 1, Prime Minister Liz Truss says. Should be noted that this is for 'typical households'.
• Truss: 'This measure will save typical households around GBP1,000 per year.'
• Truss: 'Long-term measures to secure future supplies at more affordable rates...'
• Truss: Energy plan will 'curb inflation' and spur growth.
• Truss: "Cost of energy support scheme will be set out by Chancellor in fiscal statement later this month'.
• States it will not be paid for by windfall tax on energy firms.

UK GILTS: How soon can we get an increase in the remit?

• An increase in the gilt remit could be imminent (MNI expects we will probably get an update this month). Remit revisions normally occur alongside Budgets or formal fiscal statements, and the DMO tends to base its estimates on OBR forecasts.
• However, as we still don't know the timing of any emergency Truss budget today's energy price announcement (and the potentially large costs associated) may mean that we get an interim update as soon as in the next few days which may or may not cover the entire remainder of the fiscal year. There is precedent for not covering the whole fiscal year during the furlough scheme announcements. There is also precedent for not waiting for formal OBR forecast updates.
• It's still unclear whether we will get any OBR estimates of the cost of the energy price policy ahead of a fiscal event, or whether we will just be relying on Treasury forecasts.
• An interesting element of the plan as it is expected, is that the gilt remit will to some extent will become a function of natural gas pricing. It is going to be very hard to estimate with an accuracy how much a price cap could cost the government given the volatility seen in natural gas pricing.
• If gas prices move back to their highs estimates suggest the plan could cost over GBP100bln, but if gas prices fall back for any reason, the cost could be much more modest.
• This also brings up the question of how much will the DMO want to front load issuance to alleviate the risk of needing to increase the pace of issuance further down the line.
• There are also potential impacts on the BOE's willingness to start QT when there could be a huge increase in net gilt issuance (something we will be examining over coming days).
• PM Liz Truss is expected to announce her energy price plan today. Numerous sources state that she will announce the plan in the Commons from around 11:15-11:30BST. However, this will not take the form of a formal ministerial statement and hence will not be open to debate or be required to be as detailed.
• Media speculation is that Truss will reset the Ofgem price cap between the current level (introduced in April) of £1,971 at either the current level or around £2,500 (and keep the current £400 universal payment to households over the winter months already announced as well as the extra payments for pensioners and those on low incomes). This would be in place of the cap of £3,549 otherwise due to come into effect on 1 October.
• The price cap is based on the consumption of an average UK household and is made up of a standing charge and unit prices for both gas and electricity.

FX OPTIONS: Expiries for Sep08 NY cut 1000ET (Source DTCC)

• EUR/USD: $0.9800(E1.6bln), $0.9850-65(E1.2bln), $0.9900(E889mln), $1.0000(E2.2bln)
• USD/JPY: Y140.00($1.7bln)
• GBP/USD: $1.1400(Gbp593mln)
• USD/CAD: C$1.3200($540mln)
• USD/CNY: Cny6.8000($1.3bln)