Hikes continue despite rising recession worries

Market movers today

The implications for financial markets of the flurry of G10 central bank meetings over the past two days remain a key focus, notably the decision by the Japanese finance ministry yesterday to intervene in the FX market to support the Japanese yen—something that could have broader market impact also in our parts of the world.

In addition, attention turns to the economic outlook with PMIs being released in both Europe and the US. In Europe, nothing in the August PMIs suggested that a rebound is in store in September and we expect them to overall give another gloomy reading (though we would not expect them to fall off the cliff either). If anything, the worsening energy crisis leaves further downside ahead with waning new orders and slowing hiring pace. Germany remains the epicentre of the slowdown, but it will be interesting to see whether recession risks are also growing in Southern Europe with the fading services sector boost.

In the US, the service PMI is expected to rebound modestly (though remain below the 50 benchmark) as the fall in gasoline prices supports consumers' purchasing power. Manufacturing PMI is seen remaining slightly in the expansionary territory.

Watch out also for the Italian parliamentary elections on Sunday. A right-wing win seems a done deal, but it is all about the margin of victory and whether the right wing alliance can get a two-thirds majority. It is also important to look out for the Giorgia Meloni's post-election comments on EU and the support for sanctions on Russia.

The 60 second overview

Norges Bank: As expected by both analysts and markets, Norges Bank delivered the third 50bp hike in a row. Governor Bache communicated clearly that in its base case Norges Bank is looking to continue hiking in the November, December and March meetings, but it also expects to reduce the hiking pace back to 25bp amid weakening growth outlook. We think Norges Bank's hiking cycle could come to an end already in November at 2.50%, although risks are tilted towards higher rates. 

BoE: In line with our expectation, the Bank of England hiked the Bank Rate by 50bp to 2.25% and we maintain our call for a 50bp hike in November and December and 25bp in February although risks to our call is skewed towards additional hikes in 2023. Read our review here: Bank of England Update - Review: another 50bp hike and we expect more to come, 22 September.

BoJ/MoF FX intervention: Yesterday, the Bank of Japan was instructed by the Ministry of Finance to intervene in the FX markets to support JPY after BoJ made no changes to its dovish monetary policy stance and following the rapid weakening of yen this year. USD/JPY declined sharply around 140.8, but has since recovered above 142, likely reflecting the fact the BoJ still pursues a monetary policy that sends more yen into the market. We think the pressure to give in to the globally rising yields and abandoning the yield curve control has increased further, as without changes we could quickly be back in the same situation with record weak JPY. Read our take in Research Japan - Bank of Japan intervenes to support JPY, 22 September.

SNB: The Swiss National Bank hiked its policy rate by 75bp in its meeting yesterday, bringing the policy rate to positive territory (0.50%) for the first time since 2014. The overall message was still dovish, as the communication hinted at a lower probability of intermeeting hikes going forwards. Our base case remains that the next hike will come in December, but we still highlight the risk of intermeeting hikes as SNB meets only four times a year and as inflation pressures have become increasingly broad-based also in Switzerland. We also continue to expect lower EUR/CHF despite the uptick following yesterday's announcement.

Equities: Equities finished lower, but US markets recovered somewhat into the closing. It was a classic defensive vs cyclical rotation, where health care and consumer staples fairing best while consumer discretionary and financials sold off -2%. Despite the massive pickup in yields growth did not underperform value. In fact, tech outperformed banks which is very seldom in a day that the US 10y adds 20bp. In fact, tech and communication services outperformed all other cyclical sectors. We believe that we are at the brink of the recession trade which explains these moves. S&P -0.8%, Nasdaq -1.4%, Dow -0.4% and Russell 2000 -2.3%. Futures are slightly lower this morning too.

FI: The big central bank week is coming to an end with German Bunds now flirting with the 2% level (+7bp yesterday to 1.97%). Yesterday European markets sold off markedly in the afternoon session amid UK QT and mini-budget presentation expectations for today, which have likely spilled over to the European curves. Today's PMI reports should get attention.

FX: Yesterday, MoF/BoJ followed up on the 'rate check' and the decision to keep the monetary policy stance unchanged by conducting the first currency intervention since 1998. USD/JPY reached almost 140 before erasing some of the losses in the afternoon as US yields moved sharply higher. EUR/NOK immediately lower after Norges Bank and then back up again. Sterling traded marginally on the soft side after BoE and CHF dropped 2% vs EUR after SNB ended NIRP. EUR/SEK was stable throughout the European and US sessions.

Credit: Credit markets continued the cautious sentiment ahead of the US rate decision, leaving iTraxx main slightly wider by 1.9bp at 122.4bp, while Xover widened 4.6bp, closing the session at 601.4bp.