Markets
- Today’s US eco calendar keeps the macro narrative alive: a bullish economy, sound labour market and above-target inflation. Employment growth increased by 90k according to payroll processor ADP, up from 36k in August and beating 75k consensus. Second quarter GDP growth was upwardly revised, from 1.5% Q/Qa to 2.2%. Q1 growth also turned out to be stronger than previously estimated (2.5% Q/Qa). Recall that summer PMI surveys point at a 4% Q/Qa growth pace for Q3. Details of the Q2 number showed personal consumption accelerating to 3.8% Q/Qa. Gross private investment was running at a 4.6% Q/Qa pace with net exports (-1.1% contribution with imports rising way faster than exports) being a drag on growth. Government consumption was broadly flat. August PCE deflators had an interpretation problem because of methodological changes by the Commerce Department in several categories. The new formula was applied retroactively for the last 5 years and resulted in lower PCE rates than previously reported. Anyway, both annual headline and core PCE were steady compared with July at respectively 3.4% Y/Y and 3% Y/Y. The new, lower, PCE path provided some support at the front end of the US yield curve which currently steepens. The US 2-yr yield is 3.3 bps lower compared with a +2.9 bps increase at the very long end of the curve (30-yr). European yield curves bull steepen with investors ignoring upside national September CPI releases (Germany, France & Italy) and a new uptick in gas prices (€69/MWh to €72/MWh). There are clear upside risks to Friday’s EMU release which consensus currently has at 0.5% M/M and 3.7% Y/Y for headline (2.5% Y/Y for core). Money markets recently backed away from extreme tightening bets when expected peak ECB rates hit around 3.5%. They currently discount 3.25% which is more balanced, but risk underestimating the pace at which the ECB might get there. Lack of data in between Friday’s CPI and the October 29 policy meeting (only one PMI report) suggest that the level of energy prices might eventually decide on potential back-to-back action. On other markets, European equity indices failed to cling to a positive start while EUR/USD veered off the previous YtD low at 1.1325 tested yesterday. Risks are still there though with the single currency vulnerable to a continuing underperformance of sovereign credit (investors targeting France especially). Sterling’s hawkish BoE momentum is extended today by an upward revision to Q2 growth (0.5% Q/Q from 0.4%) and by PM Burnham opening the door to a potential Brexit reversal. EUR/GBP tested first minor support around 0.8550.
News & Views
- Polish inflation accelerated to 4% from 3.4% in September on a 0.7% monthly pace, Statistics Poland reported today. The outcome printed bang in line with expectations but its details were considerably more surprising. The flash release points to a very unusual composition of inflation, with fuel prices accounting for roughly half of the annual increase and food prices exerting a mildly negative contribution. At the same time, a residual estimate by KBC Economics based on the published subcomponents suggests that implicit core inflation may have fallen to around 2.8% YoY, from roughly 3% a month earlier. If confirmed by the full CPI release (Oct 14), this would imply that the latest acceleration in headline inflation is being driven almost entirely by energy-related factors, while underlying inflationary pressures continue to ease and move closer to the National Bank of Poland’s 2.5% target. Polish swap yields tumble nearly 10 bps at the front end of the curve in a move also supported by global bond markets. The zloty slipped from the intraday highs but remains stronger on the day around EUR/PLN 4.36.
- The Bank of England’s Financial Policy Committee sounded the alarm over the risk of AI and government debts triggering a financial crisis. In its quarterly financial stability report, the policymakers said higher borrowing costs from the Iran war had increased weaknesses in private credit, AI and sovereign debt markets. The Middle East conflict was “re-intensifying the risk that vulnerabilities in sovereign debt markets, risky asset valuations, and risky credit markets crystalise at the same time”. On AI in particular, it highlighted that hyperscalers will borrow more than entire countries, such as the UK, this year. “The risk of a sharper correction persists, notably if there is a more significant shock to earnings expectations reflecting concerns around the pace of AI development or adoption.” Such a sell-off could also hit government debt, it noted. The report also mentioned the growing operational risks from AI, referring to reports of AI agents gone rogue.
