US yields tick higher on hawkish Fed comments and weak auction demand

Market movers today

The key scandi data release this morning will be the Swedish July inflation. We expect CPIF and CPIF excl. energy at 8.2% yoy and 6.6% yoy, 0.6 p.p. and 0.8 p.p. above Riksbank's forecasts, respectively. See Swedish macro section below.

From the US, University of Michigan's August Preliminary Consumer Sentiment survey will be released, focus will be especially on consumers' inflation expectations. From the Euro Area, July's revised inflation data will be released for France and Spain alongside June's industrial production data.

Keep an eye on European gas and power prices that continue to move higher.

The 60 second overview

Fed and US yields: The lower than expected US CPI reading on Wednesday has not supported the long end of the US treasury yield curve and both 10Y and 30Y UST yields are now some 10-15bp higher compared to the level before the release. Since the CPI release several Fed members have underlined that is far too early to say that inflation has been defeated and that it is too early to declare "victory" as Fed member Mary Daly pointed out last night in a Bloomberg interview.

The big theme of discussion in markets is whether the inflation data would allow the Fed to hike 50bp instead of 75bp next month. The market is currently pricing some 60bp for the September FOMC down from 70bp before the CPI release. Longer-dated US treasury yields also came under pressure as break-even moved higher and as a 30Y US treasury auction attracted weak demand pushing 30Y yields to a three week high. It seems that investors are demanding a higher yield given Fed funds and inflation uncertainty. We still see upside for longer-dated US treasury yields the next three months.

Natural gas and electricity prices: European natural gas prices continue to edge higher and yesterday the Dutch TFF gas future rose to a new record high at 215 EUR MWh. Markets are increasingly nervous ahead of winter peak season in a situation where the European heatwave is pushing energy intensive cooling-demand up. The high natural gas prices and strong electricity demand is also visible in electricity prices that rose across the continent yesterday. 

Equities: Directionless equity markets yesterday after Wednesday's rally. Sector performance reversed, with growth underperforming and value cyclicals such as banks mostly outperforming. Dow 0.1%, S&P -0.1%, Nasdaq -0.6% and Russell 2000 0.3%.

FI: US bond yields rose significantly yesterday despite the weaker than expected US inflation numbers on Wednesday as well as lower than expected producer prices. Furthermore, the US curve steepened from the long end as the market expects the US inflation to be "sticky" and well above the 2%-target even though it is declining

FX: AUD and NZD gained vis-à-vis GBP and JPY yesterday on a relatively steady day for the global FX market. EUR/USD remained above 1.03, EUR/NOK close to 9.80 and EUR/SEK below 10.40.

Credit: Credit spreads were modestly tighter yesterday with iTraxx Main tightening by 2bp to 94bp, while Crossover was tighter by 6bp to 479bp.

Nordic macro

Sweden: All eyes on July inflation this morning (08.00 CET). We expect CPIF and CPIF excl. energy at 8.2% yoy and 6.6% yoy, 0.6 p.p. and 0.8 p.p. above Riksbank's forecasts, respectively. Given the big upside surprises to Danish and Norwegian prints, risks are for a similar outcome in Sweden. Our current take on Riksbank is for 2 * 50bp in September and November followed by a final 25bp hike in February. If the print is significantly higher than expected, we will reconsider that stance accordingly. Money market pricing expects an in-between 15bp rate hike within the next two weeks (we see no reason for that even with a high print) and another 2* 75bp at the next to ordinary meetings mentioned above.

Norway: We published Reading the Markets Norway: Norges Bank to go frontloaded - 50bp hike next week yesterday. This issue serves as our preview for the 18 August Norges Bank (NB) meeting. We now expect NB to hike policy rates by 50bp instead of 25bp after the recent high inflation numbers. We still believe that the policy rate will peak in December this year at 2.25% by hiking 50bp next week, 25bp in September, and 25bp in December. Hence, our forecast is still well below market pricing.