Markets
US and EMU yields apparently are some kind of deadlocked. However, the stalemate is due to different reasons. In Europe, the basic assumption is that the ECB has finished its easing cycle. Big and sustained data surprises overthrowing the ECB projections are needed for the bank to leave its wait-and-see modus. A mediocre German IFO business confidence (87.7 from 88.9, with both current assessment and expectations weaker/weaker than expected) isn’t enough to unsettle this balance. German yields today change less than 1 bp. US markets post-Fed also still are looking for a clear direction. However, over here, its a lack of visibility that currently translates into a ‘more erratic trading pattern’. For US markets, the key question is how the Fed will prioritize its dual mandate of price stability and maximum employment. Fed Chair Powell yesterday reiterated that the Fed last week took a risk management approach. However, in the current usual context of upside inflation risks and downside labour market risks, the Fed Chair admitted that there is no risk-free path. The Fed and even more markets, can be wrongfooted by any surprise outcome of important data. Next reference is Friday’s August PCE inflation data. US yields are trading between unchanged (2-y with benchmark change) and 2.5 bps further out on the curve.
The stalemate in interest rate markets keeps the major dollar cross rates locked in tight ranges. Daily gyrations mostly are driven by technical considerations or tell more about swings in short-term mood rather than any eco news. Post last week’s FOMC the dollar tested key technical support levels, but a break didn’t occur as the path/pace of further Fed rate cuts easing was too uncertain. After some hesitancy earlier this week, the dollar today again outperforms. We didn’t see any obvious trigger. DXY jumps from 97.25 to 97.85. USD/JPY rebounds from 147.65 to 148.65. EUR/USD eases from 1.1815 to 1.1740. Central European currencies (CZK and even more the forint and the zloty) underperform. This probably has to do with president Trump yesterday advocating a more decisive NATO response against Russian aircraft violating airspace in (Eastern) Europe. The Czech National Bank today as expected left its policy rate unchanged at 3.5% and reiterated that a relatively tight policy is still needed.
Global markets for sure aren’t in an outright risk off modus. Still European equities feel some resistance (EuroStoxx 50 -0.2%) as the March top is again coming within reach. US equities open marginally higher after a mild setback yesterday. Fed Chair Powell assessed stocks to be ‘fairly highly valued’. Admittedly, at the same time he also indicated that ‘it’s not a time of elevated financial stability risks’.
News & Views
US Treasury Secretary Bessent said the administration is discussing a $20 billion swap line with Argentina and added that the country stands ready to buy up Argentina’s dollar bonds. Assets in the Latin American country, including the peso, have been sliding in recent weeks. Selling pressures piled up following a weak outcome by its president Milei in local elections in Buenos Aires, suggesting the libertarian’s popularity is ebbing going into the October 26 mid-term elections. Talk of US support gained traction on Monday and would give Milei “a bridge to the election”, Bessent said. The Argentine peso in two days strengthened from USD/ARS 1409.8 back to the levels prior to the Buenos Aires elections.
The National Bank of Belgium’s business confidence indicator continued to rise in September, from -8.9 to -7.9, the highest since April 2023. Confidence grew in all sectors, most markedly in the building industry thanks to growth in orders and a considerably more favourable assessment of order book levels. The manufacturing industry became marginally more optimistic as well, driven by upward revisions of expectations concerning demand and employment. A significantly less favourable assessment of current activity was more than offset by more optimistic expectations for business activity and overall market demand in the business-related services sector. Confidence in the trade sector, lastly, grew thanks to improved expectations regarding orders to suppliers.
