Market movers today

This will be a quiet week in terms of data releases. The key releases will be the September flash PMIs from euro area and the US on Friday.

Otherwise, the focus will remain on central banks, and the FOMC on Wednesday is the first in line. Despite last week's upside surprise in core inflation, we think the Fed is done hiking and will rather focus on 'higher for longer'.

Thursday will be packed with central bank meetings. We have Riksbank and Norges Bank, both expected to deliver their final hikes, albeit Riksbank may leave the door open for a November hike. The SNB is expected to hike by 25bp, also marking the end of their hiking cycle. Finally, we expect Bank of England to hike by 25bp to 5.5%, but for them, the August CPI print ahead of the rate decision could be critical. The Central Bank of Turkey will also meet on Thursday, and consensus expects a 500bp hike to 30%.

Finally, on Friday, Bank of Japan will announce their monetary policy decision. We do not expect any changes at this point but we do expect another tweak to YCC later this year.

The 60 second overview

Hawkish ECB comments: Global yields rose significantly on Friday putting pressure on risky assets following hawkish comments by ECB members on the outlook for rates. Slovenia's Vasle, Austria's Holzmann, Latvia's Kazaks and GC Muller have all signalled openness to hiking rates further and/or accelerating the balance sheet reduction in public remarks since Friday, which looks like a hawkish push-back to the easing of financial conditions after the ECB meeting. Even though we expect no further hikes, investors should not write off the possibility if the underlying inflation pattern continues to evolve too aggressively. We see the risk of further hikes primarily being attached to the December meeting or later, as the amount of new data at the next meeting in October will probably be too limited to justify hiking again. 

US data mixed: In the US, the preliminary data for September released on Friday was a mixed bag with the volatile Empire Manufacturing Index coming in stronger than expected at 1.9 (vs -19 in August), while the University of Michigan sentiment index was down from 69.5 to 67.7 driven by a worsening of the current assessment among consumers. On inflation, there was significant decline in 5-10Y expectations (from 3% to 2.7% and 1Y expectations (from 3.5% to 3.1%). This should ease the pressure on the FOMC to keep hiking, as real interest rates are effectively edging higher with lower inflation expectations.

FOMC on hold: We expect the FOMC to stay on hold at its meeting on Wednesday as widely expected in the markets. Focus should be on how FOMC participants assess the need for later hikes, as economic data over the summer has clearly surprised to the upside. In June, 12 out of 18 'dots' looked for one more hikes this year, but we doubt it will materialize. With little need to pre-commit to any policy action, we expect Powell to deliver a balanced message, highlighting positive development in cooling labour demand and recovering supply, but underscoring that there is still some way to go before declaring victory over inflation. See Fed preview: Plotting the way forward, 15 September.

Sentiment: This morning, Asian markets are characterized by risk aversion following declines in US and European equities on Friday. Tech shares are especially hard hit. Chinese real estate developers are also in focus ahead of Country Garden's deadline today to pay dollar bond interest and the end of creditor voting on its request to extend payment on a local bond. Equity futures point towards a negative opening in Europe. Brent crude prices are up 0.3% to USD 94.3 per barrel, which is close to the highest level seen since November 2022.

Equities: Last week marked a trend shift with European equities largely outperforming US. Friday was no exception, as US fell south of -1% while Europe held on to slight gains. In total, this summed up to US being -0.5% lower for the week and Europe up 1.5%. The main reason for this reversal was the preference for value. Global value stocks outperformed growth by 2p.p. last week. Big tech and US homebuilders were the big drag while other cyclical sectors, particularly banks and consumer discretionary, performed well. Tech continues to underperform in Asia this morning, bringing most indices lower. US futures have turned positive though.

FI: Global yields rose across regions and tenors on Friday, reversing the declines following the ECB meeting on Thursday. 10Y Bund yields were up 8bp by the end of the day, while 10Y BTP yields rose 12bp. The 2s10s Bund curve bear steepened a bit throughout the day. Hawkish ECB comments lifted the expected peak ECB rate in ESTR markets, which are now pricing in an additional 12bp of rate hikes until March 2024. In the US, Treasuries also sold off despite visible risk aversion in equity markets. This week, the FOMC meeting on Wednesday and the euro area PMIs on Friday will be the highlights for FI markets.

FX: EUR/USD edged slightly higher on Friday but fell for a 9th straight week, following the ECB's dovish hike on Thursday. The Chinese yuan has gained some ground over the past week, partly driven by PBOC measures. EUR/SEK ended last in near 11.90, thus still within the range and was relatively stable while EUR/NOK rallied 10 figures just to close the US session around 11.50. This week, FX will take direction from major central bank decisions.

Credit: The credit markets ended last week on a relatively unworried note. During Friday, iTraxx Main was almost unchanged (+0.3bp) at 69.1bp while iTraxx Crossover moved +0.5bp to 387.2bp. Last week's positive development in the CDS market was also visible in the cash bond market, where secondary bond trading saw improving buying interests. Primary markets remained active most of the week with a healthy issuance pace of both investment grade and high-yield rated instruments.

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