None of the drivers that brought us the increase in rates are going away. The front end has taken a small breather after valuations started to look stretched, even as oil continued to climb. For the European Central Bank, a full 100bp priced in over the next year does appear ambitious, given that there is still a lot of uncertainty around the outlook. But ECB chief economist Lane basically confirmed on Thursday that the ECB sees itself confronted with the adverse energy market scenario while, at the same time, all data points to ongoing macro resilience.
Long-end rates remain more exposed to upward pressures, with the Bund probing towards 3.6%. That also means limited relief for spreads, with 10y French OATs still yielding 109bp above Bunds. Keep in mind that the ‘positives’ for France from better data are also limited, with the latest business climate indicator falling. Indeed, the overall strong PMIs masked an unexpected decline in the French manufacturing index. Regarding the broader sentiment, the weakness in equities seems more a mechanical reaction to the rise in rates rather than a genuine risk-off move at this stage. The VIX equity fear gauge stands close to the low end of this year’s range.
However, after Wednesday’s level-shift higher in rates, the next big moves are more likely to come next week as it features several important data releases. The underlying tenor should not stand in the way of the bearish sentiment.
In the eurozone, the flash CPI releases start on Tuesday with reports from Spain, followed by France, Germany and Italy on Wednesday, and will be scanned for confirmation of the expected rise in both headline and core inflation rates before the eurozone-wide estimate.
It is also a big week ahead for US data, with the official jobs market data for September at the end of the week. At the time of writing, the consensus is pencilled in at a solid 104k increase in non-farm payrolls. The PCE data for August will only confirm the elevated price pressures, as the inputs are largely known from other releases. We will also get the ISMs, which in the US are usually more closely watched than the S&P PMIs, but the market will be looking for confirmation there too.