US debt ceiling compromise on the horizon

Market movers today

ECB minutes from the September meeting are due today. Focus will be on the Governing Council's (GC) diverging views on the transitory nature of current high inflation. Investors will also keep an eye on any indications about the future of the PEPP programme, after the GC already decided to slow the purchase pace during Q4.

Inflation comments will also be in focus at the joint ECB-Cleveland Fed "Inflation: Drivers and Dynamics" conference in the afternoon, with ECB's Lane and Schnabel among the speakers.

Industrial production figures for August are due across a range of European countries, including Germany, Denmark and Norway. Weak German factory orders released yesterday point to a disappointing industry performance in Q3 as production continues to be held back by global supply chain disruptions.

The 60 second overview

US fiscal policy: Republicans and Democrats in Congress opened the door to a temporary solution to the debt ceiling issue, saying they would consider a stop-gap measure extending the borrowing limit until December. A Senate vote might follow today. While the deal merely postpones the default risk until the year-end, it at least removes another downside risk to market sentiment in the near-term. US treasury yields retreated somewhat from their highs. For more on this issue, see also Research US - Government shutdowns are usually short-lived and no one is interested in a default by the end of the day, 29 September.

German politics: Germany's Greens and liberals (FDP) decided to launch talks with the Social Democrats (SPD) on forming a so-called 'traffic-light' coalition government. The talks increase the chances that Olaf Scholz, current finance minister, will succeed Angela Merkel as chancellor. But tough coalition talks could still drag on for months, given the parties' diverging views on fiscal and economic policies. We see a 'traffic-light' coalition as positive for Germany's growth prospects and expect such a government to maintain clear pro-European stance, read more in German Politics Monitor - Let the game of thrones begin!, 27 September.

Energy crisis: Europe's gas prices surge took a breather yesterday after comments from President Putin signalled that Russia was willing to send more gas via Ukraine than contracted this year, sending prices down nearly 7%. Still, European governments are growing increasingly concerned that the rapid energy price rises could endanger an already fragile recovery, see also Research Euro Area - Looming energy crisis creates a perfect storm, 4 October. The European Commission plans to outline measures for national governments next week, including compensation for the most vulnerable households, tax cuts and state aid for companies. To boost its resilience to market shocks in the longer term, the EU also mulls plans to strengthen rules on gas storage and energy supply security.

Central banks: In a surprise move, Poland's central bank yesterday raised its policy rate from 0.1% to 0.5%, the first rate hike since 2012. EUR/PLN fell on the announcement. Comments indicated that the central bank sees inflation as more persistent, warranting the policy adjustment, but kept its dovish language on the need for FX interventions. We are not convinced that the central bank has turned sufficiently hawkish, read more in Flash comment - A surprisingly large Polish rate hike, 6 October.

Equities: After starting the day in risk off, sentiment gradually improved on Wednesday. European markets lower, but US gradually higher and even managed to close the day in green as investors bought into utilities, real estate and consumer staples. Health care continued its disconnect to the other 'classic' defensive sectors, and were among the worst performers together with materials and energy. Overall though, defensives were generally in favour and growth beat value. S&P increased 0.4% and is now slightly up for the week, Nasdaq 0.5%, Dow 0.3% and Russell 2000 -0.6%. Sentiment is rebounding in Asia this morning too, with indexes in the ballpark of 1-2.5% (China still closed though) as investors buy the dip in tech. Optimism extending into the US, with futures signalling another day of gains.

FI: Headlines on natural gas and subsequent inflation implications from the early morning, amid sour risk sentiment drove EGB yields higher, with bunds touching close to -0.15% intraday. In the afternoon, EGBs recorded a relief rally as concerns about energy supply to the EU was somewhat eased after Putin's signal. 5y5y inflation swap touched 1.86% intraday, but ended broadly unchanged on the day at 1.82%. Bund ASW spreads have widened marginally despite the noticeable sell-off in previous weeks, still remaining below the 40bp (+1.3bp yesterday). 

FX: EUR/USD dropped further yesterday and risks remain to the downside. The first RBNZ hike in 7 years did not end up being a major market mover for NZD/USD. The National Bank of Poland delivered a surprise rate hike yesterday.

Credit: While CDS indices followed European equities in red, cash bonds were steady. Xover widened 8bp and Main 1.3bp. HY bonds managed to tighten 1bp while IG bonds widened 0.4bp.

Nordic macro

The Swedish Debt Office (SNDO) will release the September figures for the Swedish budget balance and borrowing requirement. Since SNDO's last forecast (May), the budget balance has come out a cumulated SEK 38bn above forecast (i.e., a correspondingly lower borrowing requirement). This has been the pattern throughout the pandemic, with stronger than expected tax incomes boosting the balance. Given these developments, it is not far-fetched to assume that the SNDO will revise the outlook in their next forecast, due on 27 October.