Markets
France and Japan were a rude awakening to markets lulled to sleep by very low volatility on FI and FX markets. Asia’s third largest economy is on track to have its first female prime minister in history after the LDP chair elections this weekend. Sanae Takaichi’s reputation as a fiscal dove is a blessing for local stock markets but a nightmare for government bonds, particularly at the long end of the curve. Add a central bank in tightening mode (both rate hikes and QE tapering) and already above-target inflation and you have rates cranking up 15 bps (40-year tenor). The 30-year maturity (+14 bps) closed at a record high. European bonds are caught in the crossfire. France stands out following prime minister Lecornu’s unexpected resignation in the early morning. He just announced his new government. But basically being a copy paste of the previous one under Bayrou it prompted a backlash, not only from opposition parties that he needs for his minority government to survive, but also from within. Lecornu felt he wouldn’t be able to navigate much-needed fiscal consolidation through such a fractured, dysfunctional parliament. President Macron has three options: call new elections (1), appoint yet another prime minister (2) or resign himself (3). (1) risks stripping established parties (including his own) from even more voters to the benefit of the likes of Rassemblement National, (2) is Einstein insanity and (3) is just not an option Macron is really considering. The bottom line is that if there’s ever going to be fiscal consolidation, it will be watered down to meaningless efforts. The deadline for a budget is next week Monday but won’t be met in this universe, meaning France will have to resort to emergency measures. French credit risk premia (vs swap) rise to the highest level since January this year. We spot spillovers to the likes of Belgium, which faces a similar daunting budget task. German yields add up to 3 bps with the rise only temporarily interrupted by safe haven flows. Treasuries and Gilts join the trend lower. US yields add 1.2-3.2 bps in a steepener. UK yields top that slightly by rising 1.3-4.5 bps across the curve. JPY and EUR are today’s laggards in the FX landscape. EUR/JPY briefly shot up beyond 176 for the first time ever before paring gains to the July 2024 record close of 175.11. USD/JPY returned from above 150 to below (a threshold which one of Takaichi’s advisors said is undesirable for JPY to weaken beyond). The pair is still trading 2 big figures higher than Friday’s close though. The French impasse weighs EUR/USD down to just south of 1.17. The weaker euro allows GBP to benefit marginally (EUR/GBP around 0.87). European stock markets cope well with the bout of uncertainty. The EuroStoxx50 slid around 1% but pared losses to just 0.15%. The French CAC40 underperforms (-1.3%). WS opens mixed.
News & Views
The Czech statistical of published preliminary CPI data for September. Prices decreased a faster than expected 0.6% M/M slowing the yearly figure 2.3% (was +0.1% M/M and 2.5% Y/Y in August). The consensus expected -0.3% M/M and 2.6% Y/Y. Food prices were 0.6% lower compared to August (2.9% Y/Y from 4%), energy prices declined 0.7% M/M (-3.3% Y/Y vs -4.4%). Goods prices fell 0.4% M/M to be 0.8% higher Y/Y (was 1.1% Y/Y in august). Services prices were 0.9% lower M/M but this left the y/y measure unchanged at 4.7% as season factors were in play. In its summer economic forecast, the Czech National Bank (CNB) expected September inflation at 2.6% Y/Y. The Czech 2-y swap yield declines 5 bps. It’s too early to draw conclusions for CNB policy. An important part of the better outcome was due to volatile food and energy prices and the CNB will take the impact of a potentially more stimulative fiscal policy into consideration in the wake of the outcome of this weekend’s parliamentary elections. The Czech korona eases modestly today, trading near EUR/CZK 24.31 compared to a 24.26 close on Friday.
The Bank of Japan today released its quarterly report on the country’s regional economies. All nine regions reported that their respective economies had been recovering moderately, picking up, or picking up moderately, although some weakness had been seen in part. However, the assessment from one region (Hokkaido) was slightly downwardly revised. In press conference after a branch manager meeting held today, the manager of the Osaka branch indicated that there was not enough information available on the wage growth, which is a key parameter for BoJ policy. ‘Wage increases will likely continue as a trend, due to structural labour shortages. But it’s hard to know what will happen in next year’s wage talks, as the impact of tariffs on corporate profits will only start to show from now on,” Kazuhiro Masaki, said.
