Markets
Last week’s ECB and even more Fed policy decisions helped to put a floor for EMU and US yields and this pattern still was the ‘by-default bias’ at the start of this week. Admittedly, the filtering-through of (mainly German) fiscal intentions to support growth develops at slower pace than hoped for. Even so, the 0.2% Q/Q EMU Q3 growth didn’t call for ECB support anytime soon and confirms the view that downside risks to growth have diminished. At the same time, inflation has landed close to the 2% target. In this context, Slovak ECB member Kazimir warned against ‘over-engineering‘ and fine-tuning the inflation dynamics to perfection. In doing so, the ECB at some point risks becoming a source of volatility rather than stability. German yields in technical trading today at 2-3 bps across the curve. Markets again see a <50% probability of a potential ‘fine-finetuning’ rate cut somewhere next year. Last week’s hawkish/no-consensus-driven Fed rate cut also still helps US yields cautiously higher from the support levels tested before the Fed decision. The 2-y yield (3.60%) left the 3.50% area. The 10-y yield (4.11%) again settles well north of 4%. US yields in a slight steepening move are rising further between 3 bps (2-y) and 3.2 bps (30-y). Some analyses also question whether heavy issuance for tech majors to finance AI related investments at some point by become a competitor for US Treasuries. At the moment of finishing this report, the US manufacturing ISM at 48.7 (from 49.1) printed slightly softer than expected (49.5). Subindices were mixed with prices also slightly softer than expected (58 from 61.9) but employment and new orders marginally better. The impact on markets remains limited for now. This weekend’s OPEC+ decision to continue with a small 137k b/d production hike in December before shifting to a pause in Q1 next year, had little impact on the oil price (and on broader markets, including inflation expectations). Brent oil even eases slightly today ($ 64.7 p/b). For equities the ‘by-default’ bias remains to hover near recent top levels even as momentum isn’t really that convincing anymore (EuroStoxx 50 +0.3%, Nasdaq +0.7%).
Section three of the ‘buy-default-continuation trade’ applies to the US dollar. An ‘a bit higher, probably for a bit longer’ US interest rate scenario, a lack of outright positive eco news from other major economies (Japan, EMU, China, Europe, the UK) and a feeling that the risk rally might have run the easiest part of its course still support the greenback. DXY (99.95) is only a whisker away from the 100 barrier with the early August top at 101.25. EUR/USD dropped below the 1.1542 October low, accelerating losses to 1.1515. After substantial losses last week, sterling started the week in more of a wait-and-see modus ahead of Thursday’s BoE policy decision. EUR/GBP (0.877) at least didn’t push any further on last week’s attempt to break the 0.88 barrier. We stay cautious on sterling. An unexpected BoE rate cut probably won’t help the UK currency. However, is the BoE holding rates unchanged as it sees it hands tied by too high inflation better news for sterling? In CE, the forint near EUR/HUF 386.7 touched the strongest level against the euro since end May last year.
News & Views
Swiss consumer prices fell by 0.3% m/m in October, more than the -0.1% expected and deepening from September’s -0.2%. Annual inflation missed the 0.3% consensus estimate as well by coming in at a mere 0.1%. The Federal Statistical Office singled out several factors to explain the price drop, including lower prices for hotels and international package holidays and for the hire of private means of transport. Clothing & footwear, housing maintenance and caretaking, by contrast, recorded a price increases. Core inflation unexpectedly slowed as well, from 0.7% to 0.5%. The Swiss franc weakened to its lowest level in around three weeks. EUR/CHF at 0.93 remains historically strong though. Bets for another rate cut by the Swiss National Bank are gradually building meanwhile. That would bring the policy rate back, currently 0%, into negative territory. It remains nothing but a tail risk so far. Swiss policymakers including SNB chair Schlegel have signaled a high bar for going negative again.
The Czech ANO party, which won the most votes in October’s election but fell short of a majority, has signed a coalition agreement today with the Motorists and the Freedom and Direct Democracy (SPD). The former is a Eurosceptic movement which campaigned against the EU’s climate goals and the latter is considered an anti-immigrant party, making the agreement a consolidation of the rightwing populist bloc. The stage is now set for ANO’s leader Babis to return as prime minister. A preliminary outline of the program manifesto included a cap to the retirement age at 65 and a pledge to stick to the koruna throughout their term.
