US CPI was the main catalyst for trading yesterday. Headline inflation slowed in August marginally from 5.4% to 5.3% y/y, in line with market expectations. Core inflation grew at a slower pace as well: at 4%, down from 4.3% and less than the 4.2% expected. Despite being at very elevated levels, the very fact that the numbers are topping off solidified markets’ belief in the temporary inflation narrative by the Fed. The US yield curve bull flattened with changes varying from -0.6 bps (2y) to -4.7 bps (20y). Inflation expectations were the driver. German yields suffered unfortunate collateral damage, reversing a 2bps advance (in the 10y) to a 1bp loss. The USD in a first reaction got hammered but pared gains later in the session with a deteriorating risk sentiment (WS up to 0.84% down) throwing the greenback a lifeline. EUR/USD finished a bit slower just north of 1.18. The Japanese yen was well bid. USD/JPY closed at 109.69, EUR/JPY aborted an attempt to recoup 130 to close at 129.47. Sterling came under pressure in the risk-off. EUR/GBP rebounded from the 0.851 area after a good but near-consensus UK jobs report to end at 0.855.

Asian-Pacific equities are moody this morning. It follows yesterday’s performance on WS and is being exacerbated by a slew of unconvincing Chinese data (see headline below). The Japanese yen builds further on Tuesday’s outperformance. In Turkey, the CBRT yesterday after-market raised the reserve requirement ratios for holding FX deposits by 200bps. EUR/TRY (9.97) is holding steady just south of 10. The USD oscillates around opening levels. Californian voters have rejected a recall of Democratic Governor Newsom, removing an admittedly small tail risk of Democrats ending up losing their Senate majority. Core bonds tread water.

We’re getting an industrial update in the US today with the Empire Manufacturing indicator and industrial production figures. Their impact on markets may be minimal in the run-up to tomorrow’s retail sales. The greenback in current market circumstances could hold the benefit of the doubt even as yesterday’s CPI made part of the market ponder the Fed’s intentions going forward. EUR/USD 1.1752/56 still serves as a first support. The US 10y slipped below the supporting trendline while the German variant again escaped the upward channel to the downside. Support for both is situated at 1.2479% and the -0.36/-0.35% area respectively. Speeches by ECB’s Schnabel and Lane are wildcards. Stronger-than-expected inflation in the UK (3.2% headline, 3.1% core) gives the Bank of England another nudge towards policy normalization. Expecting it’ll be very gradual, sterling only moderately edges higher (EUR/GBP towards 0.854).

News headlines

Chinese economic data indicated that the economic recovery faces headwinds both from the demand and the supply side. New coronavirus outbreaks and the impact of floods in some regions slowed the dynamics of domestic demand. Regulatory measures in property and education probably also didn’t help. Supply side bottlenecks continue to hamper production. China August retail sales unexpectedly slumped from 8.5% Y/Y 2.5% Y/Y, slowing YTD growth to 18.1% from 20.7%. Industrial production in August was 5.3% Y/Y, down from 6.4%. YTD growth slowed from 14.4% to 13.1. Fixed investments show a similar pattern (8.9% Y/Y YTD from 10.36%) as the government tries to curb some exaggerations in the property market. All series missed the consensus estimate. The data again had little impact on the yuan. USD/CNY is holding little changed in the 6.4425 area.

The Italian government joined other European countries in preparing steps to curb the impact of rising power prices for consumers. The government already spend €1.2 bln in the second quarter to alleviate the impact of rising power prices reducing the rise in electricity prices from 20% to 9.0%. In case no changes to the system of regulated price calculations are made, retail prices on the non-liberalized retail market could rise as much as 40% in the next quarter. The reform would consider a further review of the system of cost items in the consumer bills. System costs, amongst others, include overheads to cover renewable energy incentives.

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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