Markets
Wherever you look, there’s serious political risk with public finances as the common root cause. A cost of living crisis in Japan and public discontent with the government’s response (ie. relief measures) triggered the demise of the LDP’s majority in both houses of parliament. LDP leader and PM Ishiba had to give way for a fiscal dove, Takaichi, who argued for tax cuts earlier despite the country’s explosive debt situation. The US Congress meanwhile is divided over the continuing resolution to bring an end to the shutdown, which entered its seventh day today. Support of Senate Democrats is needed but they are using their leverage to roll back some of the social security spending cuts Republicans had planned. And then there’s France, home to textbook political unwillingness and/or inability to address a rapidly deteriorating budget situation. Back in the days, when the ECB was still accumulating sovereign bonds en masse, markets weren’t particularly worried about government debt. One pandemic and a structurally changed interest rate environment later, they are way less forgiving for those still living in the past. Outgoing prime minister Lecornu has talks planned with parties today and tomorrow to see what is still possible. But chances for him to find a solution of any kind are extremely slim. It’s merely buying president Macron time to ponder his options. None of them are appealing. The most drastic one, early presidential elections (scheduled for 2027), seems to be the most unlikely one, although pressure is mounting. Edouard Philippe, a former PM and close ally of Macron, suggested during an interview with RTL radio that’s what the president should do. New parliamentary elections on the other hand hold a “terrible risk” of still resulting in a hung assembly and prolonging the crisis. The French swapspread continues to march higher towards the 2025 multiyear high, but in a move shared by European peers. German yields add up to 2 bps at the long end in quiet trading. Treasuries and gilts lack inspiration and trade basically flat on the day. The euro underperforms against an overall stronger USD but recoups some of yesterday’s losses against GBP. EUR/USD eases to 1.167, EUR/GBP advances to but remains below 0.87. Both European stocks and WS eke out slight gains. France’s CAC40 adds 0.2%.
News & Views
Hungarian industrial production in August declined 2.3% M/M (SA and WDA) and was 4.6% lower compared to the same month last year. In the first eight months of the year industrial production was 3.9% lower than in the same period of 2024. The statistical office indicates that production volumes decreased in the manufacturing subsections – except for one – compared to the same month of the previous year. Out of the subsections having the largest weight a significant decrease was observed in the manufacture of transport equipment, while the manufacture of computer, electronic and optical products grew. In the meantime, the disappointing growth performance causes the government to put some pressure on the National Bank of Hungary (MNB) to shift to a more growth supportive policy. Yesterday, Prime Minister Orban already indicated that he saw room for lowering the MNB policy rate. His call today was reinformed by comments from Economy Minister Nagy who assessed that rates are too high and that there is room to lower them even as the MNB aims to reduce inflation and still allowing a stable forint. Despite the ‘growing political pressure’, the MNB director of Monetary policy, Adam Banai, this afternoon repeated that a tight monetary policy is still warranted. Even so, the 2-y Hungarian swap rate today declines 8 bps (to 6.18%). The forint made a step backward currently trading near EUR/HUF 392 compared to a below EUR/HUF 389 this morning.
According to UK Mortgage lender Halifax, house prices in the country in September declined 0.3% M/M. This reduced the Y/Y-growth rate to 1.3%, the slowest pace since April 2024. Halifax said that “This slight monthly dip in house prices reflects a housing market that has remained broadly stable, prices are up +0.3% since the start of the year’. Halifax indicates that affordability remains a challenge, but a relative lower mortgage rate environment and steady wage growth are seen helping support buyer confidence.
 triggered the demise of the LDP’s majority in both houses of parliament. LDP leader and PM Ishiba had to give way for a fiscal dove, Takaichi, who argued for tax cuts earlier despite the country’s explosive debt situation.){kind=link}