Sunrise Market Commentary

Markets

• Strong US economic and labour market data easily offset lower-than-expected, outdated and difficult-to-interpret August PCE inflation figures yesterday. The combination of a significant upward revision to Q2 GDP with companies accelerating hiring (ADP reported +90k vs +75k expected and up from +36k in August) fit straight into Fed chair Warsh’ bullish economic narrative. US yields fell in a kneejerk reaction to the PCE before reversing quickly. Net daily changes varied between 1.2 (2-yr) to 6.3 (30-yr) bps, resulting in new multi-decade highs at the long end of the curve. The US dollar similarly found its footing after a small intraday hit lower. EUR/USD finished at 1.133, just shy of its recent YtD trough around 1.1312. DXY rose to just shy of 101.5. Dollar strength continues this morning, pushing the EUR/USD pair to 1.1317 and the trade-weighted index to the July high near 101.64. We see little reason to row against the tide. The euro yesterday faced a significant loss of front-end interest rate support. The 2-yr German yield fell almost 9 bps. The 2-yr swap departed from their recent highs around 3.6%. That serves as a cap with money markets not willing to push expected ECB tightening beyond 3.5%. Currently we’re back at 3.25%. Moves happened even as national inflation prints from France, Italy and Germany all point to significant upward risks to Friday’s European reading – currently expected at 3.7% for headline and 2.5% core. Long-term European bonds lagged, particularly in countries where the public finance narrative is holding sway. The German 10-yr for example eased by 4 bps but the opposite happened in France. That pushed credit risk premia to new 14-yr highs of 127 bps vs. Bund. Measured against swap, the French premia is just 3 bps away from the previous post-EMU record high in 2012. Credit and political risk is definitely weighing on the common currency as well. It helps explain EUR underperformance against GBP too despite a fragile risk environment. Sterling on the other hand enjoyed a boost from an upwardly revised Q2 growth and PM Burnham explicitly stating that rejoining the EU is an option for the UK if Labour would be given the mandate to do so. Near-term though, the October 28 Budget is going to be the key catalyst for the pound. EUR/GBP yesterday fell towards the August lows below 0.855/54 (50% retracement on the Dec ’24-Nov ’25 rally). Technically, we’re looking at 0.8455 as important support. The economic calendar today features the US manufacturing ISM and is packed with central bank speeches. One by ECB president Lagarde at the annual conference of the European Systemic Risk Board may probably steer clear from monetary policy but we’ve heard her assessment before the EP earlier this week. We continue to believe that core bond yields have most upside potential at the long end of the curve and stick to a bullish dollar view.

News & Views

• Bloomberg reports on a preliminary EU agreement to reduce risk-weighted floors to 5% for the senior portions of certain securitizations down from 10%. The agreement is subject to discussions in the EU parliament and is part of the EU’s savings and investment union. The latest proposal would make it easier for banks to raise funding by selling mortgage- and asset-backed securities as well as freeing up their balance sheets via significant risk transfers. Data from the Association for Financial Markets in Europe showed a total of €1295tn of securitization outstanding by the end of Q1 2026.
• The Bank of Japan’s Q3 Tankan survey didn’t bring extra pressure for the central bank to engage in back-to-back rate hikes (market-implied probability 20%). The 210th short term economic survey of enterprises showed the large manufacturing index rising from 22 to 24 (vs 25 estimate) with the large non-manufacturing index dropping from 37 to 35 (vs 36 estimate). Both remain upbeat on the outlook. Large enterprises see inflation expectations steady at 2.1%-2.2% 5 years ahead. Among large non-manufacturers, the share planning price increases exceeded those planning cuts by 38 percentage points, down from 40 ppts in 2Q.