ON DECK FOR THURSDAY, SEPTEMBER 29

On Deck for Thursday, September 29

KEY POINTS:

  • Risk-off sentiment continues…
  • …as German inflation exceeds expectations…
  • …in a deluge of hawkish ECB-speak…
  • …while UK markets continue to suffer from a lack of Trusst
  • Canada’s economy was likely soft through July and August
  • Banxico expected to follow the Fed with +75
  • BanRep to launch mega-hike
  • US Q2 GDP revision and claims on tap
  • More central bank speak!

A combination of German inflation, hawkish ECB-speak and the ongoing UK train wreck is adding to risk-off sentiment this morning with bonds and equities tumbling. We’ll get some big rate hikes out of key LatAm central banks this aft and top shelf Canadian data as central bank speak continues.

That’s hardly a favourable market backdrop. US and Canadian equity futures are both down by around 1% and European cash markets are off by over 1%. US Treasury yields are up by 6–10bps in a mild bear steepener. Canada’s curve is underperforming out of the gates. Gilts are exploding again with 2s up 19bps and 10s up 14 (see below). EGBs are cheaper by double digit yield increases across 10s. The USD is gaining against all major crosses.

Gilts are back to suffering from a lack of Trusst. UK PM Truss kept digging and unearthed some more words to disturb markets. She deflected criticism and market reactions to her administration’s fiscal plans by saying it’s just a reflection of difficult economic times. She rejected the notion that her administration should alter course and in fact doubled down by saying “I’m very clear the government has done the right thing. This is the right plan.” And so we’re back to selling gilts with yields up 15bps from 2s through 10s. Even Carney got into the act with criticism that the Truss admin has been debasing critically important institutions and among the examples are likely the firings and rejection of supposed orthodoxy in the UK Treasury. Not exactly first world stuff we're witnessing here folks.

The early reads on Eurozone inflation are mixed. German states are pointing to upside risk to the consensus estimate for CPI to rise by 1.5% when the 8amET figures land. The individual states that report in advance were almost all up by between 1.8–2.2% m/m with just one below that at 1.4%. Chart 1 shows continued upward pressure upon year-over-year inflation. Germany ended some temporary supports like sales tax cuts but still the figures so far are exceeding estimates of the impact of such measures. Spain, however, posted 0% change in prices in September (consensus 0.6% m/m) and core inflation also ebbed. Tomorrow will reveal the rest of the Eurozone tally when France and Italy also report.

Chart 1: German Inflation by State

ECB hawks circled over the figures and momentum continues to build toward a large hike. There are just far too many ECB speakers to recap (and more coming today) but the gist of what they has markets largely priced for a 75bps hike on October 27th.

Canadian GDP is on tap for July and August updates this morning. July will be the final estimate compared to the initial ‘flash’ reading of -0.1% m/m and will offer details, but August will be fresh and may face more downside than upside risk itself given flat hours worked and generally soft readings from the goods sector but uncertainty around tracking growth in services.

Banxico is widely expected to hike by another 75bps this afternoon (2pmET) and hence match the Fed. BanRep is expected to launch a mega-hike of between 100–150bps at the same time and on the back of hot core inflation.

Canada’s bond market will shut early at 1pmET for Truth and Reconciliation Day tomorrow aka Orange Shirt day. Banks and bonds are shut tomorrow, equities not.

Central bank speak will continue with the Fed’s Bullard (9:30amET), Mester (1pmET) and Daly (4.45pmET) combining with another appearance by the BoE’s Pill (11amET) and ECB speaks including Simkus and Muller (9amET), Tenreyro (11amET), Lane (1pmET) and de Cos (4:50pmET).

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