The ECB thesis has to be validated

Markets

The ECB guided markets to a prolonged pause by saying that rates will be kept at the current level ‘for a sufficiently long duration, which will make a substantial contribution to a timely return of inflation to target’. However, with (core) inflation still substantially above target, the ECB thesis has to be validated. In this respect, several ECB members on Friday (and over the weekend) didn’t exclude an additional hike, with the December meeting (new projections) the next important point of evaluation (ECB’s Vasle). The debate on a faster run-off of the balance sheet also intensifies. All this on Friday resulted in a ‘logical‘ underperformance at the long end of the EMU/German curve with Bund yields adding 4.9 bps (2-y) to 9.0 bps (30-y). The German 30-y yield even touched a minor cycle top at 2.82%. US yields gains were more modest (3-4.5 bps across the curve). US August industrial production (+0.4%) and a sharp rebound in the NY Fed Empire manufacturing survey (1.9 from -19, including strong orders and shipments and ongoing high price index) confirmed the resilience of the US economy. Michigan consumer confidence was slightly disappointing with an unexpected easing of inflation expectations (1-y from 3.5% to 3.1%). US equities fell prey to quite aggressive end of week profit taking (S&P -1.22%; Nasdaq -1.56%), eroding a positive sentiment in Europe (Eurostoxx close +0.36%, after opening 1% higher). At $94/b, Brent oil closed at the highest levels since November last year. The USD showed a mixed picture, but basically kept recent gains (DXY 105.32). USD/JPY continues to attack the recent top just below 148. Higher EMU yields bought the euro some time (EUR/USD close at 1.0657 from 1.0643).

Asian equities join the WS decline this morning, but losses are more contained. China outperforms. The eco calendar today and tomorrow is thin with markets counting down to Wednesday’s Fed policy decision and multiple other CB decisions on Thursday (Bank of England, Norges Bank, Riksbank, Swiss National bank) and on Friday (Bank of Japan). US and EMU PMI’s on Friday give an update on activity. For now, markets aren’t inclined to fight the higher-forlonger mantra, which also the Fed is expect to maintain despite a widely expected pause. Combined with an ongoing rise in oil prices, this might protect EMU and US yields with the long end of the curve nearing cycle peak levels (10-y US 4.34%/4.36%; 10-y Germany 2.74%/2.77% area). The dollar took a breather on Friday, but remains in pole position. EUR/USD breaking below 1.0633 would further hurt the technical picture.

News and views

The United Auto Workers on Friday started a walkout at the US’s three biggest, Detroit-based, car manufacturers, GM, Ford and Stellantis. It’s the first such triple action in the UAW’s 88-year-old history. They targeted three assembly plants in three different states with UAW’s top official Fain indicating that these guerilla tactics will keep the companies guessing. The union triggered the strike after two months of negotiations failed to yield new labour deals. Apart from wage raises, better pensions and rewinning some of the privileges lost after the 2008 financial crisis, the UAW also wants guarantees that union labour will still have jobs in the electric vehicle (EV) era where the south of the US is becoming center of gravity. Fain believes that his bottleneck approach can have a similar impact as an all-out strike while putting less members on the picket line. The National Association of Manufacturers already said that small and medium-sized manufacturers across the country will feel the brunt of this work stoppage, whether they are union shop or not.

UK property broker Hamptons’ letting index showed the largest annual rental growth (12%) since the start of the index in 2014. The average rent in Britain is now £1300/month. Rents are rising fastest in Greater London (17.1% Y/Y), catching up from a slump during the pandemic, followed by Scotland (13.4% Y/Y). In a separate report, property portal Rightmove indicated that selling prices rose by 0.4% in September; the first increase since May. On an annual basis however, asking prices slid by 0.4%. Price reductions (36.6% of properties for sale) hit a level not seen since January 2011. The shaky UK housing market complicates the picture for the Bank of England who walks an extremely fine line between taming inflation and not letting the economy go bust. The central bank meets on Thursday with money markets discounting a high probability of another 25 bps rate hike (>80%).

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