Markets
Market moves in FI and FX space are small and technically irrelevant today. They ignore the bullish risk sentiment lifting stock markets to new all-time highs. ECB speeches grabbed some attention in absence of eco data today. Austrian national bank governor Kocher expects that not much will happen with interest-rate policy in the next months. He didn’t see the strong reduction in growth rates and the inflationary effects of the trade conflicts materializing that were anticipated in March and April. The difficulty now is to assess whether there will still be some effects trickling down in the next couple of months or perhaps even years. If any, it’s hard to tell whether this will be overall inflationary or disinflationary, according to Kocher who recently replaced one of the most hawkish voices inside the ECB, governor Holzmann. Bank of France governor Villeroy talked about the country’s growth forecasts, but these might also influence the overall set for the euro zone when the ECB meets next in December. Villeroy believes that current French growth projections of 0.7% for this year and 0.9% for 2026 should now be considered as minimums as the economy continued to show resilience to political turmoil in Q3. For the overall EMU growth trajectory, the central bank penciled in 1.2%-1%-1.3% in September with a first indication for 2028 being available on December 18. When it comes to inflation, the central projected an average 2.1%-1.7%-1.9% over the policy horizon. The 2027 forecast might be subject to a downgrade after an EU parliamentary committee at the beginning of the week backed amendments to the draft climate law including a one-year delay to the Emissions Trading System 2. Without ETS2 taking effect, the inflation undershoot will be larger ceteris paribus. The ETS system caps emissions and lets companies trade allowances with ETS2 extending the concept to buildings and road transport from energy generation, aviation,… ECB Simkus is one the governors who emphasized that a return to 2% inflation by 2027 heavily depends on ETS2. Finally, hawkish ECB board member Schnabel thinks that (growth and inflation) risks are rather tilted a little bit to the upside. Her personal view is one of an economy that is recovering, with a closing output gap, expecting a significant fiscal impulse which stimulates the economy. Disinflationary pressures likes the danger of cheap Chinese goods or an extension of the euro rally are currently out of play while sticky services inflation and still pretty strong food price increases deserve attention.
News & Views
The Norwegian central bank (NB) published its H2 financial stability today. The Norwegian financial system is resilient as households and firms have adequate debt-servicing capacity and as banks are solid. Several events could weaken financial stability though. Norwegian households have high debt-to-income (DTI) ratios, but debt growth has been slower than income growth in recent years. The commercial real estate market is stable, but still challenging for developers. The NB assesses Norwegian banks’ commercial real estate (CRE) exposure as substantial. In recent years, the situation has become more difficult for CRE firms owing to higher financing costs and lower property values, but high employment and increased rental income have enabled most firms to cover expenses with current earnings. Solvency in the CRE sector as a whole improved somewhat. Somewhat higher bank losses on loans to real estate developers are likely though. On the financial sector as a whole; the NB denominates losses as low with banks satisfying capital and liquidity requirements. No reaction in the Norwegian krone with EUR/NOK holding near 11.65.
Indian headline inflation dropped in October to 0.25% Y/Y, down from 1.44% in September, the lowest level ever. The decline was for an important part driven by a sharp 3.72% Y/Y decline in prices of food and beverages. The Ministry of Statistics says that the decline in headline inflation and food inflation is mainly attributed to a full month’s impact of a decline in GST (sales tax) and a favorable base effect. The Reserve bank of India has an inflation target range of 2-6%. According to Bloomberg data, core inflation rose to 4.7% Y/Y (from 4.6%), but this was mainly due to higher gold prices (57.8%). Core CPI excluding gold and sliver in this respect also eased to 2.5% from 2.8%. Even as the inflation dynamics in October maybe reached the bottom, it still supports the case for further easing by the Reserve Bank of India at its early December meeting. The RBI currently has its policy rate at 5.50% after cutting the policy rate by 100 bps YTD. The rupee trades little changed near USD/INR 88.64.
