German PPI set the tone on Friday, PMIs and Jackson Hole this week

Market movers today

The week starts out very quietly on the data front with no major releases on the calendar.

The big focus this week will be the flash PMIs for August out on both sides of the Atlantic, the ECB minutes of the July meeting on Thursday and the Jackson Hole conference from Thursday to Saturday, where Fed might firm up its hawkish message to the markets with Fed Chair Powell speaking at 16.00 CET on Friday.

The 60 second overview

Germany: German PPI set the tone for Friday's price action as the surge in energy prices and electricity is making its way through the value chain. At an annual growth rate of 37.2%, the German PPI continues to illustrate the challenging environment the economy is facing. As a result of the unfolding energy crisis in Europe, voices in Germany are getting louder for keeping their remaining three nuclear power plants running after the scheduled end in December this year. Both Scholz and Haebeck mentioned this at a government open day in Berlin yesterday. On the positive side, news over the weekend was that the much focused water key point of Kaub on the Rhine is said to be passable again and financially viable for most companies as of Tuesday due to an expected rise in the water level from 31cm to 148 cm. During the weekend, Bundesbank president Nagel also said that a German recession seems probable if energy crisis worsens. It was also announced that the Nordstream 1 pipeline will be down for maintenance for three days later this month.

Inflation watch: Inflation pressures from oil, metals, food and freight rates have come down but labour markets remain tight in US and Europe keeping wage pressures high. The euro area was hit by a further inflation shock over the summer from the sharp rise in gas and electricity prices. Looking forward, we expect inflation to stay high in the short term (rise further in the Euro Area) but decline during 2023 as recession looms.

Equities: Markets soured on Friday as the recession trade made a comeback. It was a classic reversal session, with cyclicals, growth and small caps underperforming for the day and week. Worth noting, it was more of a recession session than a stagflation session, despite the worrisome inflation figures from Europe. For example, financials at the bottom of the index despite a 10bp rise in 10y yields which is quite unusual. VIX, which has been trending lower for the past weeks jumped back above 20. This is fair to us, and hence the tailwind from positioning should start to fade from here. S&P 500 dropped -1.2%, Nasdaq -1.9%, Dow -0.8% and Russell 2000 -2%. Futures are pointing lower this morning too.

FI: Friday's price action was dominated by the German PPI of 37.2% yoy as the energy and electricity surge is making its way through the value chain. Short dated inflation fixings was bid through the day and ended almost 0.2pp higher on the day (Dec22 fixing). As a result, of the UK CPI figure, surge in electricity and gas prices and the German PPI, markets have changed the theme from growth slowdown to recession fear last week. Markets also rolled its expectations for the peak in euro area inflation to December from September. German 10y Bund yield was up by 11bp on Friday to 1.23%, amid some peripheral spread widening.

FX: The recent bout of SEK weakness, brought on by the market pricing out the probability of a inter-meeting Riksbank hike, has pushed EUR/SEK to its highest levels since early July, currently sitting at 10.60. Last week saw a substantial weakening of cyclical European currencies (e.g. SEK, GBP and Eastern Europe) vs EUR; and USD equally rose versus EUR.

Credit: iTraxx Main was 6.3bp wider to 103.5bp on Friday, closing the week 11.7bp wider on the back of the fragile risk sentiment. Meanwhile, iTraxx Crossover widened 33bp to 524.9bp, ending the week 62.9bp wider.