Strong JOLTS data supports even higher yields

Market movers today

ECB president Christine Lagarde delivers pre-recorded welcome address to a monetary policy conference, and ECB board member Luis de Guindos is among the speakers at a conference organised by the Central Bank of Cyprus.

We receive euro area PPI figures for august. Producer prices have dropped like a stick this year after the sharp increases last year. In July, the index fell -7.6% and will likely drop even more in August as the price increases peaked in August last year at 43.4% y/y. The decline in producer prices will continue to weigh on goods prices, which have declined over the last months. This is welcoming news for the ECB but also as expected after the sharp rise in producer prices last year. However, the price pressure in the service sector continues due to a tight labour market and rising wages. Service PMI output prices are still at 55.

We also get data for the August retail sales in the euro area. Retail sales in real terms has been weak this year but surprised marginally on the upside in both June and July. Rising consumer confidence and real wages should support the figure going forward, but for now, consumers still seem chary with spending.

ISM non-manufacturing and the final version of the S&P service PMI are released in the US. The flash service PMI surprised to the upside both on activity and prices paid.

The ADP employment report is released in the US, but note that it is not always a good predictor for the official jobs report due Friday.

Fed governor Michelle Bowman speaks on banking reform.

The 60 second overview

US Data & Fed: The US August JOLTs report added support for the rates higher for longer narrative, as job openings unexpectedly rose to 9.61 million (July revised higher to 8.92 million; from 8.83). The ratio of job openings to unemployed still declined to 1.51 (from 1.53) reflecting the sharp recovery in labour force participation, but in any case labour market conditions remain tight. Hiring showed no signs of cooling, involuntary layoffs remained stable below pre-pandemic levels and the uptick in voluntary quits suggests that workers' confidence in finding new job opportunities has remained high. UST yields continued to edge higher following the release, and while both the Fed's Mester and Bostic acknowledged that the recent tightening in financial conditions would likely weigh on growth, neither appeared overly concerned, with Bostic noting that businesses would not be affected 'beyond what would happen in a normal tightening cycle'.

US politics: Last night republican Kevin McCarthy was ousted from his position as Speaker of the House. The motion-to-vacate came after the last weekends' continuing resolution (CR) funding bill required House democrats' support to pass. Vast majority of House republicans supported McCarthy in a tight vote, but as all of the House democrats joined only eight hardliner republicans in voting against the speaker, McCarthy lost the vote 216-210. As the CR bill covers government funding until mid-November, the result will not have immediate effect on the economy or the markets. But even so, as this was the first time in history when House speaker has been ousted by a vote, and as McCarthy's successor remains unclear, the path towards agreeing on the remaining funding bills by mid-November likely turned even more uncertain.

RBNZ: The Reserve Bank of New Zealand maintained the Official Cash Rate unchanged at 5.50% this morning as widely anticipated by both markets and analyst consensus. While risks to the growth outlook were seen as balanced, the overall tone in the press release was to the dovish side. RBNZ maintained its forward guidance unchanged, signalling that rate hikes are most likely already over, but that rates would remain at restrictive levels for 'a more sustained period of time'. Markets have speculated with a modest chance of RBNZ returning to hiking going forward, and hence the guidance was a slight dovish surprise, causing NZD/USD to decline following the meeting. We maintain a modestly downward-sloping forecast profile, with 12m forecast at 0.57.

Japan: Service PMI declined to 53.8 (revised up from 53.3) in September from 54.3 in August. It marks the lowest level since January and thus the service sector continues to decelerate. Even so, it remains strong not least supported by a booming tourism sector, which makes up for less impressive domestic demand. In the longer run, wage data will be key for more demand and a normalisation of monetary policies. We will know more on Friday.

Equities: Equities were sharply lower as yields broke a new record. The sell-off intensified in the US session amid the hot job print. Unlike last week, this resulted in a more classic value and defensive rotation. FANMAG, tech and yield sensitive real estate underperformed while defensives and value sectors (industrials, staples, materials) held up better. However, one sector stuck out: Banks. Banks underperformed yesterday which would normally not be the case in a rising yield environment. Fear of renewed bond losses in regional banks is probably one explanation behind this quite unusual mix. However, Nordic banks sold off massively too, and even underperformed the debt sensitive real estate sector. We have a hard time understanding the logic behind this and recommend buying banks on weakness. 

Small caps underperform quite remarkably in this environment. This continued yesterday with Russell 2000 -1.7% (vs S&P 500 -1.1%) and OMX Nordic small cap -2% (vs Stoxx 600 -1.1%). This makes sense to us given the higher financing risk in small caps on top of weak liquidity. There will be a strong buy case in small caps later on, but probably not until after the recession, which is also when we expect QT to be done and liquidity to improve.

FI: Global bonds continue to rise despite inflation expectations such as 5y5y EUR and US inflation expectations either decline or have stabilised as spot inflation continues to decline. However, long-dated real rates and nominal rates have risen significantly during September and are slowly approaching 5% in 10Y Treasuries and 3% in 10Y Bunds. Furthermore, the bearish steepening of the curves continues. Yesterday's US labour market data from JOLT's report supported the higher for longer theme.

FX: The primary event in FX markets yesterday was the JPY volatility that followed USD/JPY hitting the 150 mark, which triggered a knee-jerk reaction drop in the cross. While not confirmed it has left markets speculating in the Japanese authorities intervening in the FX market. While the USD also had a strong session the Scandies came under heavy selling pressure with both EUR/NOK and EUR/SEK extending the rebounds following the last weeks' decline.

Credit: Muted activity in credit markets continued Tuesday with main 1bp wider and X-Over 4bp tighter. In Scandi space Carlsberg announced the termination of all licence agreements in Russia which means that the Russian Baltica business will be prevented from producing, marketing and selling Carlsberg group products. Furthermore, Carlsberg will take full impairment on the related assets. Overall this was not a surprise and we see no spread impact from the news.