It’s looking like an uneventful end to August for financial markets with a rinse, repeat of movements we’ve seen recently – equities under pressure, global rates rising and broad-based support for the USD.
The overriding theme for August has been a ramp-up in European and US monetary policy expectations, fuelled by hawkish central bank talk as they battle against the highest inflationary pressure seen in decades. This has seen global rates ramp higher and dealing a blow to the equity market recovery that began mid-June.
It seems fitting then, that on the last day of the month nothing has changed, with another day of price action consistent with what we’ve seen in August, particularly over the second half. US equities have spent the session in and out of positive territory but is at the bottom end as we go to print, with the S&P500 currently down 0.6% and on track to close the month with a loss of around 4%. The Euro Stoxx 600 index fell 1.1%, finishing the month down just over 5%.
Key economic data released showed Euro area CPI inflation surging to a fresh record of 9.1% y/y in August and with core inflation at 4.3%, both higher than expected by 0.1% and 0.2% respectively. Speaking after the release, Bundesbank Chief Nagel said “there’s an urgent need for the Governing Council to act decisively at its next meeting to combat inflation” and argued for a “strong rise” in rates in September further interest rate steps over following months. Bloomberg notes six GC members have publicly said that a rate hike of more than 50bps should be discussed. The market prices 67bps of hikes for the meeting next week and a cumulative 125bps by the following meeting in October, suggesting a 75bps move and a 50bps hike over the two meetings.
European bond yields continued to climb across the board and across the curve. Germany’s 10-year rate rose 3bps to 1.53%, taking its rise for the month to a massive 72bps. The UK 10-year rate rose 10bps to 2.80%, taking its monthly increase to 94bps. Needless to say, it has been a horror show for European bond investors in August, with monthly returns near to, or at, the worst on record. Three-month bill futures for June-2023, which give a sense of how much monetary policy expectations have ramped up, closed the month 168bps higher for GBP and 124bps for EUR.
Similar dynamics have been in play for the US, albeit not nearly to the same extent. US Treasury yields are slightly higher on the day, with the 10-year rate at 3.12 and up “only” 47bps for the month.
In US data, US ADP employment data showed a sluggish 132k increase in private payrolls in August, the smallest rise since January, on a revamped survey. The series has a very patchy record as an indicator of non-farm payrolls, the more important survey for the market which is released at the end of the week and for which expectations sit at 300k. The Chicago PMI was flat at 52.2, close to expectations. Elsewhere, Canada GDP rose an annualised 3.3% in Q2, weaker than expected and with the monthly track showing slowing momentum, including a 0.1% contraction in July.
European gas prices continued to fall and are now down around 30% from their astronomical peak at the end of last week, albeit still up 26% for the month and 173% over three months. A three-day “maintenance” shutdown has begun for the Nordstream pipeline that runs into Germany. Gazprom said it would suspend gas sales to French utility Engie over a dispute over payments, adding to the growing list of gas buyers that are now banned. However, market sentiment has improved as storage facilities fill and the EU looks to intervene in the energy market. Oil prices are closing the month on a soft note, with Brent crude down around 3% to USD96.50 per barrel.
Currency markets show similar moves to what we reported yesterday, with EUR again the only major to hold its ground against the mighty USD, up to 1.0050, supported by ECB rate hike expectations and weaker gas prices. GBP continues to struggle and is slightly weaker at 1.1620. If my twitter feed is anything to go by, then the move is understandable, with anecdotes of small businesses having to close their doors as they face massive rises in electricity bills, while the government remains focused on its leadership battle. Expectations that inflation that could hit 20% and closing businesses provide a downdraft to GBP.
NZD and AUD are flat on the day, but with some modest depreciation overnight, the NZD at 0.6130 and the AUD at 0.6850. NZD/EUR has slipped below 0.61 while NZD/GBP continues to track higher at 0.5275.
Yesterday, China PMIs were not quite as bad as expected, but nevertheless showed a struggling manufacturing sector and weaker growth momentum in services. Capital Economics notes that the COVID situation is worsening again, with cities responsible for 32% of China’s GDP facing related disruptions and with a growing threat of damaging lockdowns.
The ANZ NZ business outlook survey showed a small lift in activity indicators from their depressed level and still-high inflationary indicators – nothing to change the perception of a stagflationary economic backdrop. The domestic rates market had an uneventful monthly close, and yields were little changed on the day across the NZGB and swap curves. It was a month with global forces in charge, with bond and swap rates up in the order of 55-60bps across the curve, massive moves in their own right, but not standing out on the global stage.
On the economic calendar the key release tonight is the US ISM manufacturing index, where the consensus expects a fall to 51.9.
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