Weekly View – Perestroika leader dies

The death of Mikhail Gorbachev, architect of perestroika, seems grimly resonant with current events. Annual euro area inflation hit an all-time annual high of 9.1% in August. With core inflation above expectations at 4.30%, price pressures are broadening, dictated by energy: the G7’s efforts to cap Russia’s oil prices likely led to Russia’s announcement it was cutting Nord Stream 1 gas supply indefinitely. The ongoing price shocks strengthen the case for a 75bps hike at the ECB’s meeting later this week.  We are therefore underweight duration on European sovereign bonds. High energy prices prompted German Chancellor Olaf Scholz to announce a fiscal package amounting to EUR65bn or 1.8% of GDP, but it is not clear how much of this amounts to new measures or how it will be financed. In the UK, the likely new PM, Liz Truss, committed to freezing large parts of households’ energy bills. We have an underweight stance on UK gilts given prospects for higher policy rates and bond yields in coming months.

Tensions in the US job market are showing initial signs of easing, with the number of people in the labour force rising 0.5% on the July figure – the highest level since records began in 1948. Unemployment rose from 3.5% to 3.7%. As payroll figures have already surpassed the pre-covid level, a slowdown in job creation is not surprising. The rise in the participation rate will have been greeted positively by the Fed, but insufficient to pause the hiking cycle. As an indication, 10Y Treasury yields rose on the week and US HY spreads widened. We are underweight US HY. We will be watching speeches this week from top Fed officials and next week’s release of the August consumer price index for hints of any inflexion in Fed policy.

A spike in Covid cases is forcing many Chinese local governments into renewed restrictions in the run-up to the 20th Communist Party Congress on 20 October. This is a key event held every five years that chooses members of China’s politburo. The congress this year comes against a backdrop of high geopolitical tensions, with Washington forbidding US tech company Nvidia from selling top-end chips to China while Taiwan shot down Chinese drones.

A decision appears imminent on whether Volkswagen intends to list Porsche in the coming weeks. We have gone 109 days without an IPO bigger than USD25 mn, so a Porsche listing would give some confidence to markets.