Energy shock pushes European yields higher as JPY breaks key support

KBC Market Research Desk KBC Bank

Markets

In absence of US traders (Labour Day holiday) and light of EMU eco data, traders took clues from energy markets at the start of the trading week. Both oil ($98/b) and gas (Dutch TTF €74/MWh) continue their uptrend after US and Iran conducted tit-for-tat strikes on regional vessels. Copper also keeps writing records, hitting an all-time peak. European yield curves bear flattened, gaining almost 6 bps at the front end of the curve and around 4 bps at the very long end. The EU 2y swap rate (3.21%) trades just below last week’s cycle top (3.23%) going into Thursday’s ECB meeting. The EU 10y swap rate (3.42%) closed at its highest level since October 2023, and has the 2023 top (3.58%) on the radar. Apart from inflation expectations (direct link with energy), real rates extend their normalization trends. The German 10y real yield closed at 1.01%, its highest level since April 2011! The faith of (global) public finances and the rapid increase of debt servicing costs is coming more and more in the picture as we enter September budget discussions. In the US, the 10y yield will probably take aim at 4.8% resistance again (2025 top). Beyond that level, it’s a relatively small step to the 2023 top at the psychological 5% level. This week’s refinancing operation by the US Treasury, including 10y Notes (tomorrow) and 30y Bonds (on Thursday) will be an interesting test for investor appetite at current levels. Friday’s August US CPI inflation report is the other (US) highlight as the countdown to next week’s FOMC meeting starts.

Yesterday’s action on bond markets marked a contrast with relative calm on European stock markets (mixed) while EUR/USD hovered around 1.1625. All the FX action happened in JPY with USD/JPY breaking important technical support at 155 which is the neckline of a head-and-shoulders formation with interim targets around 150 and the final one around 146. Faster (expected) BoJ policy normalization, the looming intervention treat and solid eco data are all helping JPY away from multi-annual lows. Today’s eco calendar remains thin with a parliamentary testimony from several Bank of England members (including governor Bailey) being the sole highlight.

News and views

Two measures published in Australia indicated a loss of confidence at the end of the Summer. The business conditions measure of National Australia Bank dropped from +5 to -1 in August, the first negative reading in six years as slowing activity and persistent cost pressures weighed on businesses across the economy. Business confidence also eased 2 points to -8, to be compared with a level of +10 in January. NAB indicates that cost-side pressures were increasingly flowing through business profitability and activity. Purchase cost growth remained elevated at 2.3% in quarterly terms, while product price growth eased to 0.8% causing profitability to fall to the lowest level post-Covid. Weakness is also becoming more broad-based across industries. Conditions fell across six of the eight industries surveyed, led by construction, mining and manufacturing, while trading conditions also moved lower. Employment conditions remained more stable than other components. In a separate survey, consumer confidence of Westpac Bank also eased substantially to 84.4 from 88.9, with the measure now being about 12% lower Y/Y. All big subcategories in the index dropped M/M. With July CPI data (trimmed mean 3.6%) still holding too high, the impact of rising cost pressures on the economy reinforces the case for more RBA action. RBA board Member Sarah hunter also concluded that the RBA might have to raise to rates to tacking inflation. Markets currently see a probability of about 65% for RBA rate hike at the end of September. At 0.72+, AUD/USD trades near the strongest level since mid-May.

Japanese labour market data for the month of July continued to show a protracted upward trend, supporting the case for further policy normalization by the Bank of Japan. Real cash earnings rose from an upwardly revised 2.2% to 2.4%, the strongest level since May 2021. Average nominal wages (total cash earnings) also increased by an impressive 4.7% Y/Y from 4% in June, the fastest pace since 1997. The data suggest the BoJ’s attempt to realize a positive wage inflation spiral is succeeding. The Bank of Japan meets next week and is expected to raise its policy rate further to 1.2 5% from 1%. A next step is expected in December (85% discounted). Markets considering the impact of a paradigm chance in BoJ policy also helps to support a repricing in the yen.

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KBC Market Research Desk

KBC Bank

KBC's Market Research Desk publishes a number of short-term reports.

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