Markets
- European bonds are under pressure again. Yields add between 1 and 5 bps in bear flattening mode while money markets are adding to ECB tightening bets. A back-to-back hike in October is given a 55% chance with December more than fully pricing in such a move. Energy, and in particular diesel squeezed European bonds early on. European diesel prices at some point shot up as much as 7%, far more than its core component oil. Brent does settle north of $100/b again though. It followed reports late-yesterday that the US is considering diesel export bans. Pressing ahead with a ban would worsen an existing supply crisis. Second: better-than-expected European September PMIs. They underscored the “greater than expected resilience” of the economy which led the ECB to boost growth forecasts for this year and the next. The composite PMI climbed to a 3.5 year high of 53.1 in September, indicative of a quarterly growth rate of 0.4%. Both services (53) and manufacturing (53.4) business activity picked up, with solid growth across different geographies including France and Germany. The picture for new orders at eurozone companies was similar to that for business activity. Orders expanded for a third month running and at the strongest pace since May 2022. Backlogs as a result accumulated, a first since June 2022. Staffing levels increased still only modestly so far, supported by the services sector. Input buying gathered pace, allowing stocks of purchases to hold steady in September, snapping a declining streak since February 2023. Inflationary pressures intensified in September, with both input costs and output prices increasing at the sharpest rates in four months. German and French surveys refer to fuel, energy and metal prices as key inflation drivers. The year-ahead outlook waned with France to blame. French confidence took a hit from higher interest rates, political uncertainty and international competition.
- The overall tone is mild risk off. European equities trade 0.4% weaker. WS opened with small losses. The US dollar shines against global peers. EUR/USD is closing in on the 1.14 barrier. That’s the final hurdle before technicals suggest a return to the YtD low of 1.1325. France and its rising risk premia (to a fresh 15 year high today) are turning into a headache again for the common currency. CE currencies bite the dust over the diesel export ban threat. They risk losing their key alternative supplier after losing easy access to Russian oil and refined products. HUF underperforms but PLN is exposed to a deteriorating technical picture.
- US Treasuries initially outperformed but then stellar, hard-to-ignore PMIs arrived. Yields are now up 4.6-7.7 bps and pull their peers further higher with them. The composite PMI rose to its highest in more than 5 years (58.4), on improvements in both sectors. The economy would grow 4% on an annualized basis in Q3, the survey taker said.
News & Views
- UK output growth softened in September according to the monthly PMI survey, while inflationary pressures intensified. The UK composite PMI reached a three-month low at 51.7, coming from 52.5 in August and below 52 consensus. Details showed a slight acceleration in manufacturing momentum (52 from 51.7) being more than offset by a setback in services (51.7 from 52.5). Output growth across both sectors has slowed to a pace consistent with the economy growing at a mere 0.1% quarterly rate, according to S&P Global. Total new work fell fractionally, mostly because of weaker new business in services. Employment levels also decreased in September. A steep and accelerated increase in average cost burdens at private sector companies pushed the rate of inflation to a three-month high. Prices charged by private sector firms increased at a robust and accelerated pace, with the overall pace of inflation the highest since June. Despite rising inflationary pressures and weaker demand patterns, latest data indicated that overall business optimism was unchanged from August’s six-month high.
- The OECD published its interim economic outlook today, labelled “weathering successive shocks”. Global GDP growth is projected to be 2.9% in 2026 (up from 2.8%) and 3.0% in 2027 (down from 3.1%). Downside risks remain significant coming from more persistent disruptions to Middle East energy exports or weather-related supply shocks. Growth prospects could also weaken if long-term sovereign bond yields rise further or if returns on AI-related investment fall short of expectations, potentially triggering a repricing of financial assets. Inflation is expected to remain elevated for longer. G20 headline and core inflation is projected to rise respectively to 4.1% and 2.7% in 2026 before easing to 3.6% and 2.5% in 2027. The OECD believes that central banks need to ensure that inflation expectations stay well anchored while governments need to double down on public finance sustainability.
