First step towards comprehending € swap curve

Macroeconomic environment Eurozone: activity in the construction sector held up in July, with an increase of 2.6% yoy, while the prior month estimate was revised upwards to 3% (from 2.6%). UK: August headline inflation surprisingly strong at 2.7% yoy, likewise for core inflation that accelerated by 0.2pp to 2.1% yoy. House prices also beat expectations, with a 3.1% increase yoy in July. US: mixed data out of the construction sector, as housing starts beat expectation s , with an increase of 9.2% mom, whereas housing permits missed expectations, with a decrease of 5.7% mom. Equities European equity indices closed higher (for the 8 th consecutive session in the case of the EuroStoxx 50 ). Banking stocks were up on the back of a further rise in US bond yields. Energy and basic materials outperformed, whereas utilities and real estate underperformed. The VI X pulled back below 12%, while the UX2-UX1 slope is at its steepest since end-2016. Le MSCI EM $ gained 1.1%. The Dow Jones and the S&P500 were slightly up. Bond markets / Derivatives Slight bea r steepening of the German curve in the wake of US Treasuries, the US 10-year now camping above 3%. Various statements concerning the Italian budget, with an apparent determination to introduce a basic universal income that would have a real impact on the daily life of Italians, have revived concerns over BTP, yields rising by 11bp from 2 to 5 years. The volatility displayed by Italian sovereigns is l ikely to remain a feature at least until mid-October. BTP ended up dragging down other peripherals. Money markets / Central banks The decline of the US 3-month Libor-OIS spread accelerated, down to just 17bp, at a new low since last December, now no longer far off what would be “normative” levels. The EFFR still scotched at 1.92%, 3bp off the IOER. The SOFR fixed lower at 1.94%, down from 2% on Tuesday. Relatively limited movements along the bor strips, save for Short Sterling contracts, which declined sharply in reaction to the stronger-than-expected inflation and to the more upbeat sentiment a deal will be struck over the Withdrawal Agreement. FX The US dollar weakened against all G10 currencies save the Swiss franc, with fresh concerns the SNB will adopt a very dovish stance at today’s meeting. The strongest gains were recorded by the Australian and New Zealand dollars, two commodity currencies. Sterling was volatile after negative comments by Theresa May, which rejected Michel Barnier’s latest proposals concerning the Irish border. Emerging currencies rebounded, notably the South African rand ahead of the SARB meeting. Commodities Zinc prices rose sharply today, up by 3.6% on the LME. This increase came on the back of falling inventories and metal output in China. LME i nventories ar e down by around 15% since mid-A ugust.