The Dollar thrived with EUR/USD closing below the 1.1400 handle

Markets

It was outright hemorrhage on bond markets yesterday. Several factors combined into a sell-off from start to finish. First, the US proposal to limit diesel exports and Iran(‘s president) sticking with the view that the US should ends its economic naval blockade first before traffic can flow through Hormuz ended recent consolidation on energy markets. Second, EMU and US September PMI’s confirmed central bank’s view that economies are resilient and even strengthening. US business growth even surged to the fastest for over five years with job gains accelerating. Historical comparisons suggest that the latest survey data point to annualized growth of around 5% with a 4% gain now signalled for the third quarter as a whole. Eurozone output growth hit a near three-and-a-half year high with S&P Global estimating Q3 growth at 0.4% Q/Q. Growth momentum went hand-in-hand with strongest price pressures (in- and output) since May. Third, central bank comments remain hawkish with Washington-based Fed Barr being a point in case: “In my base case, further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion. We want to support sustainable, durable growth in support of maximum employment, and price stability is crucial to that.” Finally, the US Treasury’s $70bn 5-yr Note auction was weak. The auction stopped almost 3 bps through the WI yield. The highest auction yield since June 2006 failed to lure buyers with dealers (forced to bid) having to take down an unusually large share of the auction.

Daily changes on the US yield curve ranged between +9.9 bps (30-yr) and +16.7 bps (5-yr). The 10-yr yield’s 15 bps rise was the biggest intraday move since Liberation Day and pushed it easily beyond the 5% mark to levels last seen in 2007. Changes on the EUR swap curve varied between +3.2 bps (30-yr) and +18.5 bps (3-yr) with obvious multi-annual highs across the specter. Money markets are banking on back-to-back rate hikes by both the ECB and Fed, strengthened by economic resilience and the ongoing energy supply-chock. September inflation numbers have to potential to seal the deal. The core bond sell-off weighed on risk sentiment, but the damage remains contained (for now). The Nasdaq lost 1.13% with the EuroStoxx50 down 0.39%. The dollar thrived with EUR/USD closing below the 1.14 handle and rapidly approaching the YtD low at 1.1325. A further rise in the 10-yr OAT-swap spread (104 bps) isn’t helping the euro-side of the equation. The deepening global bond sell-off remains the key market theme today, despite the scheduled Trump-Xi Summit in Washington (trade truce extended to Jan 10).

News and views

New EU car registrations in August increased by 5.3% year-to-date, against a backdrop of rising energy prices and persistent geopolitical uncertainty, the European Automobile Manufacturers’ Association reported this morning. Demand for a range of electrified vehicles remained strong, driven by market support measures and a broader model offering. Hybrid-electric vehicles (HEV) ranked as the most popular power choice amongst buyers - accounting for 36.6% of registrations. Battery-electric cars (BEV) accounted for 21.7% of new EU car registrations, matching petrol cars’ share. The diesel car market represented just 7.3% of new EU car registrations, down from 9.4%. Meanwhile, plug-in hybrids captured 10% of the EU market. In Belgium, petrol cars still make up the largest share, 41.1%. BEVs come second with 37.8%, followed from a distance by HEV (11.5%).

Japanese business activity slowed in September, the PMIs suggested. The composite indicator fell from 53.5 to 52.5, a four-month low. Both goods producers (54.9) and service providers (51.6) recorded slower rates of output and new order growth compared to the previous month. New export work, however, was unchanged from August’s 8.5 yr high, solely carried by the manufacturing sector. Inflationary pressures meanwhile remained intense. Despite easing on the month, rates of both input cost and output charge inflation remained rapid overall, with the latter easing only slightly from August's survey-record on energy and raw materials, a weak JPY as well as rising transport and staff expenses. Nevertheless, companies continued to add to their payrolls, and at the steepest rate in seven months, amid greater optimism around the 12-month business outlook. The Japanese yen trades little changed today around USD/JPY 158. Japanese yields in their first trading day of the week surge up to 15 bps, responding to yesterday’s UST sell-off.

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