MISSION IMPOSSIBLE: INTEREST RATE HIKE PROTOCOL

Macroeconomic environment Eurozone : echoing Tuesday’s decline in the IFO, business climate in France’s manufacturing sector declined from 110 in August to 107 in September, 2 points below the consensus. US : the increase in house prices slowed in July, in the case of the FHFA HPI to 6.4% yoy (prior: 6.5 % ) and in the case of the Case-Shiller HPI to 5.9% (prior: 6.3%). In a surprising development, the consumer confidence index published by the Conference Board surged to 138.4 in September from 134.7 in August. It stands at its highest since September 2000 , spurred by a sharp improvement in the future conditions component. The Richmond Fed Manufacturing Index clawed back 5 points to 29 in September. Equities The Stoxx 600 resumed its ascent on Tuesday, with a gain of 0.45%, the energy sector climbing 1.92%. US indices are slightly down, with -0.26% for the Dow Jones and -0.13% for the S&P500. Turning to emerging markets, the MSCI EM is quite stable at -0.05% Bond markets / Derivatives The issue of i nflation is continuing weigh on interest rates on both sides of the Atlantic. Spreads narrowed, in particular for high beta debts. Swap spreads benefited from the significant issuance. The $ swap spread curve continued to flatten from 2 to 10 years. As regards implied volatilities, the URC outperformed especially in the case of the dollar surface ahead of this week’s FOMC meeting, while the skew remained tight. Money markets / Central banks P eter Praet tried to slow the ascent in interest rate levels triggered by ECB members by warning that “ normalisation will be long and slow” , but in vain, EZ interest rate expectations continuing to build up steam, with a further 4bp priced in for 2020. FX US dollar relatively stable on Tuesday . Sterling extended its recovery, still fuelled by the squari ng of short positions, while t he Norwegian krone benefited from the appreciation in crude oil prices. The Swiss franc and Japanese yen weakened in reaction to the keener risk appetite. Turning to emerging currencies, the most fragile (Argentine peso, Turkish lira and South African rand) corrected due to the trade tensions between the US and China. Commodities Crude oil prices extended their uptrend after OPEC’s refusal to increase its production in the near term.