OTP Morning Brief: Developed market yields surged significantly
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OTP Morning Brief: The ECB’s rate decision comes amid a rising yield environment
European markets turned sharply lower on Wednesday. Google said it will invest at least €13 billion in artificial intelligence infrastructure in Finland over the next two years. The European diesel market remains extremely tight. TTF natural gas prices are approaching €80/MWh. Wall Street indices also closed lower. As Brent rose above $100 and the US Treasury announced a smaller-than-expected bond buyback, both US and German long-term yields moved higher. However, the Japanese 10-year yield corrected to below 2.9% on Tuesday, while expectations of further rate hikes strengthened and the yen appreciated to a seven-month high against the dollar. Today, attention will be focused on the ECB’s rate decision and the US Producer Price Index (PPI) for August.
OTP Morning Brief: Escalation continued in the Middle East
Escalation in the Middle East continued, with the Houthis now targeting Saudi facilities, pushing Brent crude prices close to $100 and intensifying global CPI concerns. Despite this, European equity indices showed only minimal movement, while the major US stock indices started the week in negative territory. German exports came in weaker than expected. Hungarian CPI was 1.3% year-on-year in August. Hungary’s budget deficit exceeded HUF 2,000 billion in August, although the figure was distorted by the pre-financing of the RRF program. US and Hungarian bond yields rose, German yields declined, while the forint remained largely unchanged. Today, attention is likely to focus on French industrial data and the Polish interest rate decision.
European equities declined, the ECB raised its key interest rates by 25 basis points as expected, while the Turkish central bank left its policy rate unchanged. Wall Street indices extended their decline, while oil prices continued to rise. In the US, initial jobless claims edged down, while producer price inflation accelerated in line with expectations. Developed market yields surged significantly, despite the US Treasury's buybacks of longer-dated securities. Today's primary focus will be on US CPI data, while tomorrow the University of Michigan Consumer Sentiment Index and the US federal budget balance for August are due for release.
European equities declined, the ECB raised its key interest rates by 25 basis points as expected, while the Turkish central bank left its policy rate unchanged
Major European indices closed lower yesterday, with the STOXX 600 declining 0.7% following the previous session’s drop of more than 1%. Investors assessed the ECB’s policy decision, under which the central bank raised its key interest rates by 25 basis points, in line with expectations. The ECB also revised its growth forecast for this year slightly higher, while projecting average CPI at 3%. Christine Lagarde emphasized that CPI risks remain tilted to the upside due to the conflict in the Middle East, meaning price pressures could stay above target for an extended period. Market sentiment was also weighed down by the continued rise in oil prices, with Brent crude climbing above USD 107 per barrel after a 6.3% surge. Higher energy costs reinforced market expectations that monetary conditions may remain restrictive for longer. At the sector level, technology stocks were among the weakest performers, with ASML falling more than 1.6% and SAP declining 2.8%. Investor sentiment was further pressured by another sharp increase in oil prices. Escalating tensions in the Middle East and attacks on maritime shipping routes pushed Brent crude to as high as USD 105 per barrel, intensifying concerns over CPI.
Major indices in the CEE region delivered mixed performance yesterday, with the BUX outperforming after rising 1.0%. The Prague index gained 0.6%, while the Warsaw market declined 0.7%. Among Hungarian blue chips, OTP and MOL advanced, while the other two heavyweight stocks closed lower. At its September meeting, the Turkish central bank left its key overnight lending rate unchanged at 37%, in line with market expectations, marking its fifth consecutive rate decision without a change. According to the central bank’s statement, despite volatility in financial markets and an unfavorable global macroeconomic environment, incoming data suggest that underlying CPI trends have moderated since the June meeting. At the same time, the central bank noted that the renewed escalation of the Iran-US conflict and the resulting surge in energy prices pose upside risks to CPI.
Wall Street indices extended their decline, while oil prices continued to rise. In the US, initial jobless claims edged down, while producer price inflation accelerated in line with expectations
US equities declined for a fourth consecutive session as continuously rising oil prices, driven by the prolonged conflict in the Middle East, heightened concerns over CPI and interest rate risks. Market sentiment was primarily weighed down by higher energy prices. US WTI crude settled at USD 102.5 per barrel following a 6.7% surge, marking its highest level since May. Since the beginning of the year, WTI has soared nearly 80%, while it has risen by more than 50% since the outbreak of the Iran conflict at the end of February. Higher yields and energy prices particularly pressured growth and technology stocks. Intel fell 5.6%, while Micron Technology declined 4.9%, as investors feared that persistently restrictive monetary conditions and rising energy costs could slow economic growth. However, after the closing bell, Oracle surged 7% after reporting revenue and earnings that exceeded expectations. By the end of the session, money markets were pricing in a roughly 71% probability of a 25-basis-point Fed rate hike in September. Rising oil prices and higher government bond yields continued to create significant uncertainty across equity markets.
In the US, initial jobless claims filed during the first week of September declined by 1,000 to 206,000. The figure was broadly in line with market expectations of 205,000. Jobless claims therefore remained at historically low levels after falling to a nearly 60-year low of 189,000 in mid-July. Continuing claims, which provide an indication of the number of unemployed individuals receiving benefits, decreased by 1,000 to 1.774 million in the last week of August. This was slightly better than the market consensus of 1.780 million. Overall, the data further reinforce the view that the US labor market remains resilient. The persistently low level of jobless claims is consistent with the assessment of Fed policymakers that the US economy continues to operate close to full employment.
In the US, producer prices rose 0.4% month-on-month in August following a 0.1% increase in July, in line with market expectations. This marked the strongest monthly increase in three months and was primarily driven by a 1.1% rise in industrial goods prices after declines in the previous two months. The largest contribution came from a 24.1% surge in diesel prices, while gasoline, jet fuel, heating oil, and tobacco product prices also increased. In contrast, residential electricity prices fell 0.5%. Services prices rose 0.1% month-on-month, mainly due to a 2.0% increase in freight transportation services. Prices for passenger air transportation, legal services, hospital inpatient care, and motor vehicle retailing also moved higher. On an annual basis, the producer price index accelerated to 5.4% from 4.8%, slightly exceeding market expectations of 5.3%. The core measure excluding food and energy prices increased by 0.2% month-on-month, below both the market forecast of 0.3% and July's 0.3% pace. However, on an annual basis, core producer price inflation accelerated to 4.6% from 4.3% in July, matching market consensus exactly.
In the US, existing home sales declined by 2.0% month-on-month in August, in line with market expectations, following a 1.7% decrease in July, bringing the annualized sales pace down to 3.98 million units. Housing market activity therefore remained subdued amid elevated mortgage rates. Meanwhile, supply conditions improved, with the inventory of homes available for sale increasing by 3.2% to 1.62 million units. The median existing home price stood at USD 429,100, representing a 1.6% increase compared to the same period a year earlier.
Developed market yields surged significantly, despite the US Treasury's buybacks of longer-dated securities
A significant sell-off took place in the US Treasury market as oil prices continued to rise amid concerns over the prolonged conflict in the Middle East. The yield on the 10-year US Treasury note climbed 11 basis points to 4.94%, reaching a multi-year high, while the 2-year yield rose to 4.55%, its highest level since July 2024. The rise in yields continued despite the US Treasury's buyback of longer-dated government bonds, which had little meaningful impact on the broader market. During the session, a 30-year Treasury auction attracted strong demand, suggesting that higher yield levels have become increasingly attractive to investors. Nevertheless, market attention shifted toward the CPI release due on Friday and next week’s Fed policy decision, both of which may prove decisive for expectations regarding the future path of interest rates.
Market participants generally viewed the ECB’s accompanying communication as more hawkish than expected. As a result, euro area bond yields moved higher, with the yield on the German 10-year government bond rising to 3.5%, its highest level since 2011. Following the ECB’s announcements, money markets priced in around 60 basis points of additional rate hikes through spring 2027, compared with 51 basis points before the decision. Hungarian yields beyond the one-year segment increased by 4-6 basis points, while the domestic 10-year yield rose 5 basis points to 5.58%. The forint weakened by 0.2%, approaching the 365 level against the euro.
Today's highlights
Asian markets were also trading lower heading into the close. In Japan, the 10-year government bond yield approached the 3% level on Friday after rising by more than 7 basis points.
Today's primary focus will be on US CPI data, while tomorrow the University of Michigan Consumer Sentiment Index and the US federal budget balance for August are due for release.
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