28 September 2021 Macro & Strategy Research Markets Today

Economic data, news & events ■ ECB: The two-day ECB Forum on Central Banking starts today. The event, which used to take place in Sintra before the pandemic, will be conducted online. ECB President Christine Lagarde will deliver the opening speech at 14:00 CET. Afterwards, Luis de Guindos (14:30 CET) and Fabio Panetta (15:45 CET) will chair panels on corporate indebtedness, while Isabel Schnabel will chair a panel on future prospects for inflation (17:00 CET).

■ Fed: Today, US Treasury Secretary Janet Yellen and Fed Chair Jerome Powell will testify before the Senate Banking Committee on the CARES Act and other pandemic-era support measures (16:00 CET). On monetary policy, Mr. Powell is unlikely to deviate from the remarks he made at last week’s press conference following the FOMC meeting. Then, he indicated that tapering could start in November and end around mid-2022, while the FOMC “dot plot” signaled a slightly earlier and steeper rate hiking cycle. Since then, two FOMC participants, Boston Fed President Eric Rosengren and Dallas Fed President Robert Kaplan, have announced plans to retire in the coming days following revelations of personal account dealing. Both were hawkish, and their departure may ease pressure on Mr. Powell to tighten policy more quickly. Ms. Yellen will certainly be asked about government-shutdown and debt-ceiling risks, with congress needing to pass a stopgap funding bill by Thursday night to avoid a government shutdown, while the Treasury is expected to run out of cash as soon as mid- October unless the debt ceiling is raised.

Market news & views Early enthusiasm in equity markets waned yesterday as bond yields marched higher. At the end of the day, the Euro Stoxx 50 closed up 0.2% and the S&P 500 finished 0.3% lower. US Treasuries were hit again, as the 10Y yield rose another 4bp to 1.49%. EGBs were more resilient, with the 10Y Bund yield rising 0.5bp to -0.22% while the 10Y BTP yield increased by 1bp to 0.79%. This morning, equity markets are largely unchanged from yesterday. The S&P future is slightly lower and the Euro Stoxx 50 future is trading 0.2% higher. The 10Y UST yield is up 2bp at 1.51%. As mentioned above, all eyes are on the ECB’s central forum. For bond markets, the highlight is probably the discussion on “The future of inflation” at 17:00 CET, which includes panelist Charles Goodhart, who has attracted much attention in recent months with his book The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival (co-authored by Manoj Pradhan).

This panel might be especially interesting in light of euro area market-based inflation readings trading close to the multi-year peak it reached on just 13 September. The 10Y EUR ILS never broke above a well-defined resistance level around 1.70% to 1.75% between mid-2014 and August 2021. It was only in early September that the 10Y ILS hit a level at almost 1.87%, before consolidating back to 1.8%. Over the past few days, it has moved higher again and currently trades at 1.86% (yesterday’s close), almost marking another multi-year peak. Thus, with another release of rising headline and core inflation readings on Friday, we might come even closer to the 2% level. US long-term yields continue their rebound following the FOMC meeting, now just exceeding 1.50% at the 10Y tenor again, but in FX the USD remains mixed. The dollar index (DXY) is still having difficulty climbing above the August high of 93.73 and this is reflected in the EUR-USD’s ability to hold the line close to 1.17, i.e., still slightly above last month’s low of 1.1662. The 10Y USD-Bund spread has not widened too much beyond 170bp for now, after hitting more than 180bp in August, and this is probably offering the euro a cushion to the downside. The JPY is weak too slipping back beyond 111, probably reflecting uncertainty over the election of the new LDP leader and new Japanese prime minister tomorrow, as well as a sluggish Tankan Survey for 3Q21 on Friday. Indeed, we expect some profit-taking to emerge soon after the LDP leadership issue is resolved, and this may drag the USD-JPY back close to 110. In the meantime, the recent rise in oil prices is helping commodity currencies counteract the renewed USD strength and the NZD may outperform the AUD and CAD this week, ahead of the RBNZ meeting on 6 October, when it may become the second G10 central bank to start a rate hike cycle after the Norges Bank. A full break below 10.00 remains the key test for EUR-NOK. Aside from this, the daily agenda is mostly focused on speeches by central bankers, as the ECB kicks off its forum on central banking, while Fed Chair Jerome Powell and US Treasury Secretary Janet Yellen testify before the US Senate. US consumer confidence may also attract some interest, but the FX market might also be exposed to some degree of volatility and intraday swings this week, as the month and quarter end. In EM, we see any USD-TRY retreat as a buying-on-dips opportunity ahead of the likely breach of the 9.00 area on the road towards 10.00. Prospects of the NBP kicking off a rate cycle in November, while remaining on hold again at the meeting next week, may limit selling pressure on the PLN. The HUF, on the other hand, is probably suffering from an overreaction to the NBH’s decision to halve the amount of rate hikes from 30bp to 15bp, which rendered the HUF insensitive to Hungary’s credit upgrade last Friday.

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28 September 2021 Macro & Strategy Research Markets Today

Supply corner Today, Italy sells EUR 5.5bn of BOT 31Mar22. BOT net supply will be negative due to EUR 6bn of redemptions. At the previous 6M BOT auction, held at the end of August, BOT 28Feb22 was sold at an average yield of -0.519% and is now trading at around -0.57%. As the BOT curve is rather flat, BOT 31Mar22 is likely to be priced close to the previous 6M BOT. Today, the Dutch Treasury sells EUR 3-5bn of the new DSL Jan29. The long 7Y bond will be the third and final new benchmark issued by the Netherlands this year. With respect to the pricing of the new bond, interpolating DSL 0.75% Jul28 and DSL 0.25% Jul29, we obtain a fair value of -0.31%, roughly 2bp higher than its yield in the grey market. Last week, in addition to the issuance calendar for the next quarter of 2021, the Dutch Treasury published an update of its funding plan for the year. Given a modest reduction in its cash deficit (by around EUR 3bn), it plans to lower the net supply of money market (MM) securities by a similar amount. On the other hand, DSL issuance was unchanged at EUR 60bn, corresponding to net supply of EUR 44bn. The Treasury indicated that potential future fluctuations in its borrowing requirements will be absorbed by MM securities.

DATA & EVENTS CALENDAR

Time (CET) Country Data Period Est. Consensus Previous 28-Sep-21 14:00 EC Lagarde opens ECB Forum on Central Banking Sep 28 - - - 14:30 EMU Guindos chairs session at ECB Forum on Central Banking Sep 28 - - - 15:00 US S&P/Case-Shiller Home Price Index (% yoy) Jul - 20.0 19.1 15:00 US Fed's Evans makes welcome remarks at payments conference Sep 28 - - - 15:45 EMU Panetta chairs session at ECB Forum on Central Banking Sep 28 - - - 16:00 US Conference Board Consumer Confidence Sep - 115.0 113.8 16:00 US Powell and Yellen appear before Senate Banking panel Sep 28 - - - 17:00 EC Schnabel Chairs Session at ECB Forum Sep 28 - - - 19:40 US Fed’s Bowman speaks at Community Bank Event Sep 28 - - - 20:00 EMU ECB's Panetta delivers pre-recorded remarks Sep 28 - - - 21:00 US Fed’s Bostic discusses the economic outlook Sep 28 - - - 29-Sep-21 1:00 US Fed’s Bullard discusses US economy and monetary policy Sep 29 - - -

Source: Bloomberg, UniCredit Research

SUPPLY AND REDEMPTION CALENDAR

ISSUANCE REDEMPTIONS & COUPONS Date Country Bonds Amount Maturity Country Expiring Bonds Amount Coupons 28-Sep Tue NL New DSL Jan29 3.00 / 5.00 7Y BE OLO 4.25% Sep21 15.22 1.30 IT 6M BOT 5.50 MM 29-Sep Wed GE Bund Aug31 4.00 10Y IT BTP Aug26 1.50 / 2.00 5Y IT BTP 0.95% Dec31 2.00 / 2.50 10Y IT CCTeu Apr26 1.25 / 1.75 CCTeu 30-Sep Thu 1-Oct Fri IT 0.56 2-Oct Sat 3-Oct Sun Auctions and amounts in grey denote our expectations. Source: EMU debt agencies, UniCredit Research

Authors: Chiara Silvestre, Economist (UniCredit Bank, Milan) Dr. Loredana Maria Federico, Chief Italian Economist (UniCredit Bank, Milan) Marco Valli, Head of Macro Research (UniCredit Bank, Milan) Daniel Vernazza PhD, Chief International Economist (UniCredit Bank, London) Michael Rottmann, Head of FI Strategy (UniCredit Bank, Munich) Roberto Mialich, FX Strategist (UniCredit Bank, Milan)

Editor: Michael Rottmann, Head of FI Strategy (UniCredit Bank, Munich)

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28 September 2021 Macro & Strategy Research Markets Today

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