Bond Yields on the Rise

Danske Bank

Economic

Bond

Stocks

Commodity

Forex

Summary:

The most relevant data release today is the U.S. consumer confidence indicator from the Conference Board. After some improvements over the summer consumer confidence fell in August and consensus is looking for a further small decline in the September print.

In Hungary, the central bank will announce its monetary policy decision. All analysts in Bloomberg consensus (we included) expect the interest rate to remain unchanged at 13.0%.

In Sweden, we receive PPI figures for August.

U.S.

Credit rating agency Moody's yesterday expressed concern over a potential government shutdown in U.S., which it argues would reveal institutional and governance weakness not seen in other Aaa-rated countries.

Fed

Minneapolis Fed President Neel Kashkari overnight said that he expected the Fed to raise interest rates one more time this year and keep policy tighter for longer if the economy proves stronger than expected.

Energy

Natural gas prices have risen to the highest level since April over the past week. The price increase comes despite still mild autumn weather, increased energy production from wind turbines and end to the strike among Australian LNG workers. Instead it might owe to unstable natural gas flows from Norway due to maintenance and higher global demand for LNG.

Equities were mixed on Monday

Europe and Nordics continued to bleed but U.S. managed to close a tad higher for the day. S&P 500 up 0.4% (after losing -3% last week), Stoxx 600 -0.6% (-1% last week) and Nordics -0.3%. No doubt yields play a crucial role in the current risk-off regime. Thereby, Monday started with huge differences between sectors and styles.

Bond proxy Orsted and Fortum were worst off, falling -4-5%. It is also worth noting that mainly defensives sold off while cyclical retail (Pandora and H&M flat), pulp (Stora Enso +1%) and industrials (Atlas +1%, Sandvik and Volvo 0%) held up.

Bash in line with our strategy though, where we highlight retail, pulp, banks and short cyclical industrials, financed by growth/quality defensives.

Overall, our value overweight has performed very well lately which of course speaks for some mean reversion at a later stage. U.S. futures are a notch lower this morning again.

Last week's higher for longer narrative extended yesterday with rates rising across the board for the 3y+ maturities. The higher rates came from the long end with 30y Germany ending almost 11bp higher on the day. The 10y and 30y Bund yields reached highest levels since 2011. There was no clear trigger for the significant sell-off led by the long end.

EUR/USD broke below 1.06 for the first time since mid-March. Meanwhile, USD/JPY is closing in on the highs of October last year as U.S. yields continue to climb. The SEK defied the shaky risk sentiment and traded strong on the back of the Riksbank starting their hedging program, with EUR/SEK briefly below 11.70 on the day. EUR/GBP traded above 0.87 for the first time since March as markets continue to digest the BoE disappointment last week.

Credit

Credit spreads widened modestly yesterday, with iTraxx Xover closing in 421.6bp (+4.9bp) and Main in 78bp (+0.8bp). However, despite the slightly downbeat sentiment, several primary market transactions were printed and reception was solid, with oversubscription around 2.0x for most transactions.

Nordic macro

In Sweden we get the PPI numbers for August (CET 8:00). Whereas we expect a further normalisation of the index that measures producers' prices of goods manufactured and sold in Sweden (HMPI), the index containing import prices might show a less favourable development, given the increase in oil prises during august. Riksbank's Per Jansson will hold a lecture on the Riksbank's objectives and tasks later today (CET 18:00).

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Owen Li

Commodity

Energy – European gas rallies

European natural gas prices saw further strength yesterday with TTF rallying by 11.69% to settle at a little over EUR44/MWh, its highest level since April.

Further disruptions to Norwegian supply appear to have provided a boost, with the Troll field seeing a delayed startup after a compressor test. The outage is affecting about 25mcm/day of capacity. This is happening at a time when there is also a planned outage at the Skarv field, impacting a little over 22mcm/day of capacity.

However, fundamentals in the short term remain comfortable, with European gas storage 95% full as we head closer to the start of the new gas year, which officially gets underway on 1 October.

Metals – Crude steel production softens

The latest data from the World Steel Association show that global crude steel production softened further to 152.6mt in August compared to 158.6mt in July. Crude steel production is now at its lowest level since February as demand from China remains weak. Compared to year-ago levels, crude steel production increased by 2.2% year-on-year with China output increasing by 3.2% YoY to 86.4mt, while the Rest of the World's production increased by 0.7% YoY to 66.3mt. Cumulative global crude steel production increased by 0.2% YoY to 1.26bn tonnes over the first eight months of the year.

For the year, major gains come from China and India with production increasing by 2.6% YoY to 712.9mt and 10.5% YoY to 92.2mt respectively. On the other hand, EU production dropped by 9.8% YoY to 85.7mt over the first eight months of the year.

Gold prices softened to US$1,915/oz yesterday as treasury yields continue to move higher on expectations of 'higher for longer' Fed policy rates. The Fed's latest dot plot shows that the tightening cycle may not be over yet and that the economic data could continue to be a major driver of future policy decisions. U.S. 10Y treasury yields have increased to a fresh five-year high and broken above 4.5%, which continues to weigh on gold prices.

Agriculture – Damage to Ukraine's Odessa port

Wheat prices firmed up yesterday on reports that Russia has 'significantly damaged' the Odesa port in Ukraine, one of the major ports for grain export. The latest attacks were reported to have damaged port infrastructure, grain storage facilities and warehouses at the ports. Ukraine's export of grains from the port has largely stopped after Russia pulled out of the export deal. However, recently a few ships were reported to have managed shipments from the port. The latest attacks are likely to stop any residual exports from the port and also lower the possibility of export resumptions from the port in the near term.

The USDA's weekly export inspection data for the week ending 21 September show that U.S. soybean and wheat shipments rose while corn exports slowed over the last week. U.S. weekly inspection of corn exports stood at 661kt, lower than the 676kt over the previous week and up from 550kt reported a year ago. For wheat, export inspections stood at 451kt, up from 423kt last week but lower than the 589kt seen for the same period last year. Soybean export inspections stood at 482kt, higher than 430kt from a week ago and 292kt from a year ago.

The USDA's latest crop progress report shows that 53% of the U.S. corn crop is rated in good to excellent condition, up from 51% in the previous week. Meanwhile, the harvest is progressing well with 15% of the crop harvested, up from 11% at the same stage last year and also above the five-year average of 13%. As for the U.S. soybean crop, 50% of the crop is rated good to excellent, down from 52% the previous week. However, the harvest is progressing well, with 12% of the area harvested, up from just 7% at the same stage last year. It is also higher than the five-year average of 11%. Finally, winter wheat plantings are falling behind last year with 26% of the area planted, down from 30% at the same stage last year and also lower than the five-year average of 29%.

Source: ING

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Samantha Luan

Economic

Forex

Dollar is being the standout performer this week, bolstered significantly by surging U.S. treasury yields. Dollar index, which gauges the greenback against a basket of six major currencies, reached a high not seen since the previous November, breaking 106 mark. Contributing to the bullish momentum, EUR/USD has plunged through a pivotal support level at 1.06, and USD/JPY is inching closer to 149 mark.

Interestingly, 10-year yield has surged to an impressive 4.5%, marking the highest point since 2007. Initially, a wave of risk aversion propelled Dollar during U.S. trading hours. However, after major stock indexes rallied to end in positive territory, the greenback's ascent moderated. Still, as major Asian markets trended downwards, Dollar managed to hold its ground.

At present, Swiss Franc is lagging, being the week's poorest performer, with the Euro not faring much better. British Sterling is aiming to pare back its losses from the previous week, while Yen is in a flux, with traders cautious due to potential interventions by Japanese authorities. Remarkably, despite Dollar's strength, commodity-linked currencies have managed to showcase some resilience.

Technically an immediate focus now is on whether 10-year yield could power through the medium term channel resistance to accelerate up, and the subsequent impact on other markets. If materialized, TNX could march further to next target at 61.8% projection of 1.343 to 4.333 from 3.253 at 5.100, which is above 5% mark. On the other hand, while a retreat from the current level cannot be ruled out, near term outlook in TNX will stay bullish as long as 4.362 resistance turned support holds. The market will likely get more clarity on these movements in the upcoming days. Surging Treasury Yields Propel Dollar to 10-month High, EUR/USD Breaks Key Support_1

Surging Treasury Yields Propel Dollar to 10-month High, EUR/USD Breaks Key Support_1

Surging Treasury Yields Propel Dollar to 10-month High, EUR/USD Breaks Key Support_2

In Asia, at the time of writing, Nikkei is down -0.92%. Hong Kong HSI is down -0.84%. China Shanghai SSE is down -0.33%. Singapore Strait Times is down -0.08%. Japan 10-year JGB yield is up 0.013 a 0.744. Overnight, DOW rose 0.13%. S&P 500 rose 0.40%. NASDAQ rose 0.45%. 10-yea ryield rose 0.104 to 4.542.

Fed's Kashkari: Strong economy might warrant another rate hike

Minneapolis Fed President Neel Kashkari said at an event overngiht that the strength of the economy might necessitate higher interest rates for an extended period.

Kashkari commented, "If the economy is fundamentally much stronger than we realized, on the margin, that would tell me rates probably have to go a little bit higher, and then be held higher for longer to cool things off."

In line with last week's updated dot plot from Fed, where 12 out of 19 members indicated a potential rate hike this year, Kashkari affirmed his position, stating, "I'm one of those folks."

However, Kashkari also pointed out a caveat, suggesting the possibility of rate cuts if inflation undergoes a swift decline next year. He elaborated, "Depending on what is happening in all the economic data that we look at, that then might justify backing off the federal funds rate — not to ease policy but just to stop it from getting tighter from here, and that's something obviously we'll have to look at."

Japanese officials weigh in on Yen's slide as it approaches 149 against Dollar

This week's decline of Yen against Dollar, which seems poised to breach 149 mark, has brought remarks from Japanese officials into sharp focus. Market participants are keen to decipher indications of when Japan might transition from verbal caution to active intervention, even though it's clear that Japan wouldn't pre-announce such a move.

Finance Minister Shunichi Suzuki, reiterating his consistent position, stated today, "Foreign exchange rates should be determined by market forces, reflecting fundamentals."

Suzuki emphasized that "Excessive volatility is undesirable," and assured that the government is monitoring the currency fluctuations with a "high sense of urgency". "We will respond as appropriate to excessive volatility without ruling out any options," he added.

Echoing Suzuki's sentiments, the newly appointed Economy Minister, Yoshitaka Shindo, stressed the significance of stable currency movements that mirror economic realities.

Pointing out the multifaceted impact of the Yen's position, Shindo elaborated, "Weak Yen has various effects on economy such as raising import costs for consumers, improving competitiveness of exporters."

With these comments, the stage is set for a heightened scrutiny of Japan's potential interventions in the currency market. Market participants will no doubt remain vigilant to further remarks and actions by Japanese officials in the coming days.

Looking ahead

The economic calendar is empty in European session. Main focus will be on U.S. consumer confidence to be released later in the day. U.S. house price index and new home sales will also be featured.

EUR/USD Daily Outlook

Intraday bias in EUR/USD is back on the downside as fall from 1.1274 resumed after brief consolidations. Sustained trading below 1.0609/34 cluster support will carry larger bearish implication, and target 1.0515 support next. On the upside, above 1.0672 minor resistance will turn intraday bias neutral and bring consolidations. But outlook will stay bearish as long as 1.0764 support turned resistance holds. Surging Treasury Yields Propel Dollar to 10-month High, EUR/USD Breaks Key Support_3

Surging Treasury Yields Propel Dollar to 10-month High, EUR/USD Breaks Key Support_3

In the bigger picture, focus stays on 1.0634 cluster support (38.2% retracement of 0.9534 to 1.1274 at 1.0609). Sustained trading below there would rase the chance of bearish trend reversal. That is, fall from 1.1274 could be reversing whole rise from 0.9534 (2022 low). But even if it's just a corrective move, deeper decline would be seen to 61.8% retracement at 1.0199. For now, risk will stay on the downside as long as 55 D EMA (now at 1.0825) holds, in case of rebound. Surging Treasury Yields Propel Dollar to 10-month High, EUR/USD Breaks Key Support_4

Surging Treasury Yields Propel Dollar to 10-month High, EUR/USD Breaks Key Support_4

Source: ActionForex

To stay updated on all economic events of today, please check out our Economic calendar

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FxPro Group

Forex

Germany's Ifo business climate index held steady in September at the previous month's level despite expectations of further deterioration.

The business climate indicator fell from 85.8 to 85.7, better than the expected 85.1 but still the lowest since mid-2020. Excluding this spike, the only time in modern history that sentiment was worse was in the nine months between November 2008 and July 2009.

The Current Situation Index is trying to find a floor, falling from 89.0 to 88.7. Expectations have slightly improved, with the relevant component rising from 82.7 to 82.9. It may be too early to talk about a turnaround, but previous turning points in this component have coincided with the EURUSD's turnaround in the following months. From this perspective, it is a reliable leading indicator for the markets.

Has German Business Climate Bottomed Out?_1

On previous occasions, however, the expectations index reversed sharply because of monetary easing and fiscal stimulus. This is not the case now, and the improvement in sentiment is in response to a period of low gas prices and slowing inflation. However, neither the issue of reliable gas supplies and energy prices in general nor the slowdown in inflation has been resolved.

Moreover, the ECB raised interest rates less than two weeks ago, in contrast to sharp cuts on previous occasions when business sentiment in Germany and the eurozone was similarly low. A further deterioration in sentiment cannot be ruled out without support from the government and ECB measures. In these circumstances, the scenario of a weaker single currency directly correlated with risk appetite remains a priority. Has German Business Climate Bottomed Out?_2

Has German Business Climate Bottomed Out?_2

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SAXO

Forex

USD: Higher-for-longer keeps dollar as the sole winner in portfolios, 'Three S' risks ahead

The Fed's higher-for-longer message is continuing to reverberate through the markets, and U.S. 10-year Treasury yields have now climbed above 4.5% for the first time since 2007. That is weighing on risk assets, and as a result, the shift in inflation regime has come back to haunt asset allocators, questioning once again the relevance of the 60-40 portfolios. In this scenario, cash remains king and exposure to the U.S. dollar remains key to hedge the downside risks in portfolios. Higher yields, U.S. resilience and quarter-end flows can continue to support the dollar this week, but risks are seen increasing into October.

This week is light on data but heavy on event risks. Today's consumer confidence data could be key in the U.S. as higher gasoline prices along with high borrowing costs and increasing spending concerns could weigh. August consumer confidence plunged to 106.1 from July's 114 as consumers' assessment of the labor market deteriorated. Entertainment spending should also have started to taper into September and Bloomberg consensus expects U.S. consumer confidence to plunge further to 105.5.

Dollar Remains Bid on Yield and Safety_2

Still, clear deterioration in data may only start to come after all the September data has been reported and there may be some more room for USD strength to sustain. This week's event risks, however, remain key to monitor and could bring some bumps. An adverse outcome could also risk a fast forward to stagflation concerns, and disrupt the USD rally momentarily. 'Three S' risks are lining up – including the student loan repayments that restart in October, the autoworker strikes that are now encompassing the supplier networks, and a potential government shutdown.

Federal student loan repayments are set to restart on October 1 after having been suspended since March 2020, and Moody's estimates that 24 million borrowers will owe an average of $275 per month. This could curtail consumer spending, especially when pandemic-era savings are being exhausted. Meanwhile, the widening United Auto Worker (UAW) strikes against GM and Stellantis risk dampening U.S. industrial output and could result in higher car prices, suggesting stagflation risks. Lastly, a U.S. shutdown could arrive into the coming weekend if Congress fails to provide funding for the fiscal year starting October 1. This could mean thousands of federal workers may be furloughed without pay, again highlighting spending cut risks if the shutdown is prolonged.

While direct economic impact from strikes or shutdown could be limited, sentiment could turn around quickly with all these risks stacking up into the beginning of Q4. Dollar still remains attractive from a safe-haven perspective, given the cratering in yen and Swiss franc, however some consolidation may be likely with net positioning in the dollar also turning to a long after eight weeks. A look at previous shutdown from December 2018-Janauary 2019 showed that dollar declined for four consecutive weeks before gains returned when the resolution was reached. Gold could outperform on safe-haven demand, while sustained gains in oil prices could underpin CAD. If a shutdown is averted, USD bulls could come back stronger.

Market Takeaway: Dollar remains king in portfolios, but uncertainty ahead could mean some consolidation. Risks to sentiment from government shutdown could bring gains in XAUUSD, and higher oil prices continue to underpin CAD.

EUR and JPY face double whammy of higher dollar and gains in oil prices

Eurozone's PMIs were mixed on Friday with German economy seemingly at a turnaround but France slipping further. Overall, Eurozone PMIs remained in contraction, signalling risks for Q3 GDP. Germany's Ifo also showed a marginal improvement, but remained insufficient to spark optimism. Focus is on monthly credit data due Wednesday and flash CPI later this week, and soft numbers could continue to put emphasis on peak ECB rates, bringing EUR downside. Break of key support at 1.0635 in EURUSD has opened the doors to 1.05.

Meanwhile, higher Treasury yields and oil prices continue to push the Japanese yen lower. USDJPY was at fresh 11-month highs, and is testing the 149 handle with verbal intervention remaining lacklustre. Near-term risks is seen at the 150 handle with any real intervention potentially bringing the pair lower towards 145 temporarily but unlikely to reverse the weakness of the yen in any material way.

Market Takeaway: USD strength and higher oil prices could bring fresh lows in EUR and JPY, although near-term intervention threat looms for yen traders.

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CMC

Forex

European markets got off to a poor start to the week yesterday as concerns around sticky inflation, and low growth (stagflation), or recession served to push yields higher, pushing the DAX to its lowest levels since late March, pushing both it and the CAC 40 below the important technical level of the 200-day SMA.

Recent economic data is already flashing warning signs over possible stagnation, especially in Europe while U.S. data is proving to be more resilient.

Worries over the property sector in China didn't help sentiment yesterday after it emerged Chinese property group Evergrande said it was struggling to organise a process to restructure its debt, prompting weakness in basic resources.

The increase in yields manifested itself in German and French 10-year yields, both of which rose to their highest levels in 12 years, with the DAX feeling the pressure along with the CAC 40, while the FTSE100 slipped to a one-week low.

U.S. markets initially opened lower in the face of a similar rise in yields with the S&P500 opening at a 3-month low, as U.S. 10-year yields continued to push to fresh 16-year highs above 4.5%. These initial losses didn't last as U.S. stocks closed higher for the first time in 5 days.

The U.S. dollar also made new highs for the year, rising to its best level since 30th November last year as traders bet that the Federal Reserve will keep rates higher for much longer than its counterparts due to the greater resilience of the U.S. economy.

The focus this week is on the latest inflation figures from Australia, as well as the core PCE Deflator from the U.S., as well as the latest flash CPI numbers for September from France, Germany, Spain as well as the wider EU flash number which is due on Friday. This could show the ECB erred a couple of weeks ago when it tightened the rate hike screw further to a record high.

On the data front today the focus will be on U.S. consumer confidence for September, after the sharp fall from July's 117.00 to August's 106.10. Expectations are for a more modest slowdown to 105.50 on the back of the continued rise in gasoline prices which has taken place since the June lows.

Last night's late rebound in U.S. markets doesn't look set to translate into today's European open with Asia markets also coming under pressure this morning.

Another warning from ratings agency Moody's about the impact of another government shutdown on the U.S. economy, and its credit rating, didn't help the overall mood, while Minneapolis Fed President Neel Kashkari said he expects another Fed rate rise before the end of the year helping to further boost the U.S. dollar as well as yields.

EUR/USD – slid below the 1.0600 level yesterday potentially opening the prospect of further losses towards the March lows at 1 0515. Currently have resistance at 1.0740, which we need to get above to stabilise and minimise the risk of further weakness.

GBP/USD – slipped to the 1.2190 area, and has since rebounded, however the bias remains for a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.

EUR/GBP – currently have resistance at the 200-day SMA at 0.8720, which is capping the upside. A break here targets the 0.8800 area, however while below the bias remains for a pullback. If we slip below the 0.8660 area, we could see a move back to the 0.8620 area.

USD/JPY – has continued to climb higher towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.

Source: CMC

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Glendon

Economic

The economic slowdown is understandably causing concern among investors. However, while slower growth in China will impact the global economy and financial markets, we think the short-term pain is necessary to avoid bigger problems down the road. China's economy is in the early stages of a long-term transition away from an export-driven, investment-led model toward a more balanced one with more domestic consumption.

During these large transitions, slowing growth is almost inevitable and—from a long-term perspective—desirable.

A Much Bigger Economy Today…and One in Transition

Part of the growth downshift is simple math. China's economy has roughly tripled in size since the Global Financial Crisis (Display), making it much harder to sustain high growth rates. In fact, trying to boost growth could lead to excessive leverage and, in the case of China, overreliance on sectors with high economic multipliers, such as housing. That would only intensify existing imbalances in China's system, so we believe that slower, but more sustainable growth is a healthier medium-term path.

China's Growth Is Slowing: What Does It Mean?_1

The other main driver of slower growth is the transition away from a heavier reliance on physical investment (Display) and exports toward a more balanced economic framework. Because so many resources have been devoted to these industries, they have excess capacity today. Trapped capital translates into lower prices as spare capacity is absorbed, and it results in slower growth as wasted, or wasting, resources are eliminated or redeployed.

China's Growth Is Slowing: What Does It Mean?_2

Meanwhile, sectors with more positive medium-term outlooks continue to thrive, including consumer-facing staples, such as travel and restaurants. Solar and wind power projects are also humming, as are electric vehicle production and other high-tech and green products. It will take time for these industries to replace lost activity in real estate and heavy investment, which is why overall growth is slowing.

A Shift in Global Growth Dynamics

How should markets and the rest of the world process China's growth outlook?

We think it's important to avoid focusing too much on the government's growth target—roughly 5% this year. Even if the economy grows at that pace, it won't feel like “good” growth to those outside China. The country's best-performing industries won't likely fuel expansion abroad as much as they have before. It takes massive commodity imports to build roads and bridges; selling movie tickets and restaurant meals doesn't.

All this means that China's economy won't be as big an engine of global growth as it's been in the past. For markets, this evolution may seem disorienting—and is understandably causing jitters among many investors. Slower growth in the world's second most important economy likely means lower overall global growth, even more so because China's growth is becoming more domestically focused.

Expect Targeted, Gradual Stimulus

Much of the anxiety focuses on risks from the transition. Highly levered Chinese firms, particularly in property sectors, will likely feel stress, and policymakers won't be inclined to deliver large-scale support, because it would exacerbate imbalances and delay the transition. Property-developer defaults could become severe enough to imperil the banking sector or local government finances—but that's not our base case. The transmission mechanism from China's financial system to the world is limited in direct terms, though turmoil in China could rattle sentiment elsewhere.

To sum things up, we share the view that China's economy is slowing, and that slower growth will likely last as the economy transitions. There are also financial-market risks associated with that slowdown. But in our view, the “cure” to that problem—piling more debt and leverage onto the economy and property sector—would be worse than the ailment.

We think China's policymakers feel the same way, so we expect targeted, gradual stimulus to manage the slowdown, not a “big bang” stimulus to push growth into a faster trajectory.