AFS Markets Blog: Morning 23/09/2026

• Meanwhile in markets, punters have gone too much gung-ho on ECB rate hike pricing. And I am not saying that because of the recent positive undertones in the Iran war headlines;

• For the October ECB Governing Council meeting, about 13-14bps of hikes are priced in. Meaning it’s a coin toss between another quarter point hike or a hold. I think the reasoning behind the ECB speeding up the pace of rate hikes leans heavily on the September staff forecasts. Current energy futures pricing is consistent with the ECB’s adverse scenario. And if the energy shock is worse than expected, the risks to price stability must be greater, forcing the ECB to step up the pace of tightening. Furthermore, one could reason that President Lagarde before her expected departure In December wants to hand over a ‘clean house’ to her successor. Raise the deposit rate to the nice round number that is three percent (so, quarter point hikes in October and December). Then call it a day. Much like what Lagarde’s predecessor Draghi did when he restarted QE just before he parted in what was a very contentious decision;

• However, when I look at Eurozone economic data, a relatively benign picture emerges. Take core inflation. When I strip out package holidays (noise) and administered prices (what the government decides the price should be), monthly core inflation averaged 2.2% YTD. The last three readings averaged 2.1%. Furthermore, while business survey data makes clear that the economy is picking up steam, price pressures have eased somewhat over the summer right through August. The share of firms in manufacturing and services expecting higher prices has been at the low end of this year’s range in the past three months;

• Then there are the ubiquitous energy futures prices. They can go either way. Since mid-September, Brent crude futures prices have plunged ten percent while Dutch natgas futures prices fell by a chunkier fifteen percent. Both are officially in correction territory. All on smoke and mirrors, by the way. The most concrete piece of information we got on a deal were overnight reports that President Trump’s envoys Witkoff and Kushner parleyed with Iran’s Foreign Minister Araghchi through mediators at the UNGA yesterday. So, quite flimsy stuff. I think the most bullish thing that can be said is that a lot of bad stuff simply didn’t happen. Few, if any reports on strikes on commercial shipping in the Strait of Hormuz. No US-Iran tit-for-tat strikes. And the Yemen war ‘contained’ between Saudi Arabia and the Houthis;

• More importantly, no matter many how many times Trump says the war will be resolved after the US midterm elections or that he will blast Iran into oblivion, all I hear is: I’d rather have a deal and lower energy prices now. And then maybe I can fend off political catastrophe. As we pointed out yesterday, the polls are quite frankly terrible for the Republicans. The way things are going, they will not just lose the House, but also the Senate. And lose Senate races in GOP strongholds like Texas of all places. No surprise that we see the first stories of GOP members of Congress grumbling and distancing themselves from Trump;

• Bottom line, the ECB is overpriced. And yes, we are still beholden to the whims of one man. You know how;

• Turning to some overnight market commentary, Brent crude futures and Dutch natural gas futures are loitering not far above yesterday’s lows at $98.33 a barrel and 71.93 euros per MWh. The leg down in energy futures prices has predictably dragged down UST yields, albeit only modestly. In the greater scheme of things, on the charts the bond market still looks like a bloodbath, with yields across the curve having broken out to the upside and not far from multi-decade highs. The only reprieve for bonds is yield curve flattening, which tells me that there’s a limit to how much further long end yields can rise. Worst hit in sovereign bond space are OATs, with the 10y Bund spread at 104bps near its post-Eurozone crisis high;

• Equities have proven to be resilient as of late. That’s not just a story of lower energy futures prices. AI stocks have staged a remarkable rebound in the past week or so. The twenty AI stocks on our market screener (ranging from hardware to hyperscalers and the Mag7) are up an average of nine percent over the past five days. Chip designer AMD even eked out an ATH while a couple of other names are only marginally below their ATH;

• In FX space the broad dollar has extended its recent gains, pushing EURUSD down to the low 1.14-ish and USDJPY up to the high 157s. For the record, USDJPY has erased about half the intervention declines. EURCHF has rallied strongly as of late, trading at 0.939 last. Perhaps a part of CHF strength can be explained by safe haven flows triggered by OAT-Bund spread widening;

• Looking ahead, eyes will be on monthly US and Eurozone PMIs out this morning (in the case of the latter) and this afternoon (in the case of the former). I will be paying particular attention to price pressures in the surveys. Besides the PMIs, we have a smattering of ECB-speakers on tap.

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