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Markets today: more work for the Fed, the UK’s huge trust fund

A broad rise in global core yields was the big news overnight, fueled by a better-than-expected US ISM report and news that UK Prime Minister Truss is planning a huge debt-financed fiscal stimulus.


Today’s Podcast

Overview So good it’s bad

  • Global Core Yields Rise on ISM Surprise and UK Big Fiscal Spending Plan (Debt Financed)
  • U.S. services ISM rises against expectations of slight decline
  • US corporate issues also play a role. 10-year UST now at 3.3492%
  • The USD rises again, the JPY suffers
  • British pound jumps on news of Truss fiscal plan, showing resilience
  • AUD succumbs to stronger USD (now at 0.6735), finding little support in RBA rise
  • Coming Soon: AU Q2 GDP, CH Trade, BoE Bailey, US Trade, BoC, Fed Brainard, Beige Book

Overview of events
AU: RBA cash rate target (%), seven: 2.35 vs. 2.35 exp.
GE: Factory orders (m/m%), July: -1.1 vs. -0.7 exp.
WE: ISM services index, August: 56.9 vs. 55.3 exp.

A broad rise in global core yields was the big news overnight, fueled by a better-than-expected US ISM report and news that UK Prime Minister Truss is planning a huge debt-financed fiscal stimulus. Large US corporate issues also played a role, pushing 10-year UST yields to 3.3349%. US stocks are grappling with the good news from the ISM amid rising expectations for a 75 basis point Fed hike later in the month. JPY comes under renewed pressure as UST 10yr yields head north, GBP jumps on PM Truss news as AUD succumbs to stronger Dollar, finding little support from RBA’s rise ‘yesterday.

The ISM services index in the United States rose in August to a solid 56.9 against expectations of a slight decline to 55.3 from 56.7. Report details were also very strong, with trade activity and new orders both posting their highest readings of the year. External demand was also strong, with export orders growing at the fastest pace in nearly a year. Meanwhile, the prices paid sub-index remained elevated at 71.5, indicating continued strong inflationary pressures in the services sector, although less extreme than a few months ago. Overall, the survey paints a picture of solid activity in the services sector of the US economy, supported by wage growth, suggesting that the Fed still has some work to do to calm the economy.

Global core bond yields rose ahead of the ISM release following yesterday’s announcement in our time zone of a major (debt-financed) spending plan by Britain’s new Prime Minister Truss, the publication ISM then fueled the fire (to higher yields). UST 10-year yields jumped 15bps to 3.349%, with the 2-year rate lagging, up 11bps to 3.50%, steepening the 2-10y curve to -15bps. base. Meanwhile, the UK gilt curve steepened with the 10-year duration up 16 basis points to 3.10% while the 2-year eased 2 basis points to 3.14% . The 10-year Bunds closed up 8 basis points at 1.63%.

The media reported that Britain’s new Prime Minister Truss was planning to unveil a huge debt-financed fiscal stimulus package to ease the pressure on the cost of living from energy bills. Bloomberg reported that Truss planned to cap the average household energy bill below £2,000 for 18 months, while the FT said the price would be capped at around £2,500. Either way, Ofgem’s planned increase in the household energy price cap from £1,971 to £3,549 in October would not go ahead.

If implemented, the policy will provide significant relief from the looming inflationary pressures that were expected to come given Ofgem’s known price increases. which had prompted warnings from several economists that UK inflation could exceed 20% next year. The policy will also reduce near-term recession risks by easing pressure on disposable incomes . But the policy comes at a huge cost, estimated at £130bn according to Bloomberg (~6.5%/GDP). Combined with the other fiscal policies proposed by Truss, including canceling the planned corporate tax hike and cutting National Insurance, the overall cost could be in the order of 9% of GDP. , a huge fiscal stimulus at a time when the UK economy is already in full swing. capacity and overall inflation is around 10%.

So, while the policy is likely to dampen short-term inflationary pressures, the actual increase in disposable incomes and support to businesses suggests that they will have a higher medium-term implication for inflation. It is also an untargeted fiscal stimulus that will not create material increases in productivity, the UK government has relied on the generosity of foreigners for funding and on QE from the BoE, now the The prospect of spending money without a guarantee of generating an improvement in the UK economy’s medium-term growth potential will make things more difficult (more expensive), with the BoE selling rather than buying government bonds. British state, which makes the outlook even more difficult.

Against this backdrop, the slope of the UK government curve makes sense, while the pound also performed, hitting an overnight high of 1.1609, before losing altitude after the USD recovered. mojo following the stronger than expected ISM report (now at 1.152). Longer term, if the UK economy slows as expected, foreign appetite for funding the UK government will be an important dynamic for the GBP.

Europe is considering its own response to the energy crisis, with energy ministers due to meet on Friday evening to discuss a range of options. Unlike the UK’s debt-funded stimulus package, the main option in the EU appears to be a windfall tax on energy producers, the proceeds of which are recycled back to consumers to protect them from rising energy costs. energy. The FT said the EU would likely consider additional measures to reduce demand, on top of the voluntary 15% reduction in gas consumption previously agreed by EU countries, as well as assistance to energy companies who struggle to meet margin calls on derivatives contracts. The euro is slightly lower overnight and briefly touched a new 20-year low, but is back to around 0.99. The immediate target for the Euro is the ECB meeting on Thursday evening, with the market expecting a 75 basis point rise.

USD remains in the ascendant, hitting new 20-year highs on DXY basis overnight. Continued USD strength reflects the relatively stronger state of the US economy (certainly relative to Europe and China), continued higher Fed rate expectations and appetite for the still cautious risk of investors, given the lingering risk of recession next year.

The standout currency move in the past 24 hours has been USD/JPY, which catapulted up to 143 (+1.7%), a new 24-year high. USD/JPY now has a “technical room” to test its 1998 high just above ¥147, but we think a much weaker JPY from here is likely to force the hand. of the BoJ with an adjustment of its YCC policy the most likely outcome. Speaking yesterday, ex-BoJ Okina said “it’s hard to say that yen weakness at this level is positive overall,” adding that the BoJ should be careful not to depreciate too much by accentuating this position. Hard to disagree.

AUD and NZD are both around 0.9% lower than yesterday, opening the new day at 0.6735 and 0.6039 respectively.. The two antipodean currencies succumbed to the strengthening USD, with the AUD showing little reaction to the RBA’s 50 basis point rise yesterday. The RBA signaled that further hikes were likely in the coming months but, in a change from the last statement, omitted its reference to ‘normalization of monetary conditions’, a possible nod to the rate of cash close to neutral. Our economists believe the change in language potentially foreshadows a slowing in the future pace of increases to 25 basis point increments, depending on how the data plays out. RBA Governor Lowe is expected to provide more color on the policy outlook in a speech tomorrow. The market is pricing around a 40% chance of another 50bp rise in the RBA next month and around a 30% chance of the same in November.

The S&P 500 closed the day down 0.41% while the NASDAQ was at -0.74%. Rising yields and rising Fed rate hike expectations are weighing on sentiment. A classic case of good news being bad news, as the ISM reveals that the service sector of the US economy is in poor health, implying that the Fed still has some work to do to bring inflation under control.


  • Australia Q2 GDP is released this morning and after the release of GDP partials in recent days, our economists are sticking to their forecasts of 0.7% q/q and 3.2% y/y, with some upside risks given the indicators solid services consumption of business indicators. The main driver of growth should be robust household consumption, with high spending on goods and consumption of services continuing to rebound after a first quarter impacted by Omicron. Hours worked also rose sharply in the second quarter.
  • RBNZ Deputy Governor is speaking this morning on the implementation of monetary policy.
  • Chinese trade figures for August are also expected to come out during our day, with the market expecting the trade balance to come in at $92.7 billion, still strong but down from the surplus of $101.2 printed in July. . Export growth (13% YoY vs. 18% before) and import growth (1.1% YoY vs. 2.3%) are expected to slow.
  • Later today, Germany gets industrial production for Julythe euro zone publishes its second estimate of Q2 GDP (0.6% ex. unchanged) and in the United Kingdom, BoE Governor Bailey and the MPC testify in Parliament.
  • This evening, the US gets trade numbers for July (-$70.1 billion) and the BoC encounters a market torn between a 0.75% or 1% rise (price at 91 basis points). Early tomorrow morning Fed Brainard discusses the US economic outlook ahead of the release of the Fed Beige Book.

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