Sunset Market Commentary

Markets

The interesting market moves took place in the US money market corner. The SOFR fixing on Wednesday (applicable for today) shot up to 4.29% compared to the 4.19% the day before. This overnight interbank rate in normal conditions fluctuates neatly within the Fed’s policy target range of currently 4-4.25%. The overshoot is suggestive of funding pressures building. It could be a temporary deviation with markets struggling to digest this week’s UST coupons settling and (net) TBill supply but it bears following up to check whether structural issues are playing as well. In a broader perspective, the SOFR rate has been grinding higher since October 8’s low of 4.12%. and may have been one of the reasons why Fed chair Powell earlier this week announced that the central bank plans to end quantitative tightening in the coming months. Commercial bank reserves held with the Fed have recently dropped below the $3tn mark in a sign of liquidity being sucked out of the financial system. In 2019, when the Fed was doing QT on autopilot it caused a sudden liquidity crunch which the central bank is keen to avoid this time around. The SOFR back then surged to above 5% compared to the Fed’s 2-2.25% policy rate. Fed’s Waller said the amount of reserves then dropped below 8% of GDP and has suggested to keep it at around 10-11% instead – which is more or less where we are today.

Other markets are little changed. Both Treasury and Bund yields trade within wafer thin trading ranges of 1 to 3 bps. France’s OAT-swapspread holds steady after narrowing sharply yesterday in anticipation of Lecornu surviving today’s two censure motions. The one tabled by the far-left failed with 271 lawmakers backing it vs 289 needed to pass. For all but seven members of the Socialist Party, Lecornu’s costly concessions such as suspending the pension reform, sufficed. The motion tabled by Le Pen only got 144 votes in favour. A series of central bank policymakers hit the wires. Fed’s Waller called for a cautious removal of monetary restriction in 25 bps steps. Miran begged to differ and favours a 50 bps move, adding that he thinks 25 bps will be the outcome nonetheless. ECB’s Wunsch said the probability for another rate cut has come down and said services inflation still needs monitoring. Mann from the BoE voiced similar concerns, saying that the “domestic component” is the dominant inflation feature. Gilts slightly outperform nonetheless. Industrial output data from the UK this morning beat expectations at the margin but was offset by a minor miss in stalling service sector activity. The pound doesn’t care much though and is even one of the better performers today. EUR/GBP eases to 0.867 & cable (GBP/USD) tops the 1.34(5) barrier. Stock markets grind higher in Europe (EuroStoxx50 +0.5%) and the US (+0.2-0.7%), with decent to strong earnings so far supporting the equity market.

News & Views

Czech producer prices fell by 0.4% M/M in September whereas consensus only expected a 0.1% slowdown. Producer price deflation accelerated on an annual level from -0.8% Y/Y to -1% Y/Y with prices now dropping Y/Y for an 8th consecutive month. Details showed monthly price declines for agricultural producers (-1.9% M/M; +7.1% Y/Y) and industrial producers (-0.4% M/M). The latter are also down Y/Y (-1%). Construction work prices rose by 0.7% M/M and 3% Y/Y. Domestic service producer prices in the business sphere proved most sticky, adding 1.4% M/M to be up 4.5% Y/Y. EUR/CZK is going nowhere at 24.29. Recent political elections didn’t really cause a setback for CZK which remains firmly supported by CNB’s anti-inflationary rhetoric and steady rate path ahead.

German Chancellor Merz addressed national parliament today, previewing next week’s EU Summit. He backed progress on a European Capital Union saying that European firms need a sufficiently broad and deep European capital market so they can finance themselves better and faster. One way of doing so is creating a pan-European stock exchange to help firm deal with competition from the US and Asia. Earlier, Merz already gave up long-standing reluctance to transfer financial supervision to the European Securities and Markets Authority. Apart from the economic and financial strategy, EU leaders will also focus on migration, security & energy and the implementation of an AI act.