Markets
- The French OAT sell-off morphed into the key market theme this week. The 10-yr OAT-swap spread widened from 100 bps at the end of last week to a new all-time high at 145 bps as of today. What started with some natural credit spread widening linked to an intensifying core bond sell off turned into a separate story the past two days with the 2027 budget proposal putting the focus on bloated public finances. The proposed €54bn fiscal effort should help narrow the budget deficit from 5.4% of GDP to 5%. That’s far from sufficient to stop the exponential rise in debt ratio (120% of GDP) with time (and the interest rate snowball) ticking rapidly against the French government. While a political crisis and budget fight like last year will likely be avoided, there’s little appetite amongst politicians to put in more effort in the run-up to next year’s presidential election. As of today, the Rassemblement National, leading run-off polls, still have to unveil its detailed public finances strategy. They are expected somewhere this month with Le Pen earlier hinting at a constitutional “golden rule” limiting the public deficit to 3% of GDP, a requirement for the state’s operating budget to be balanced and a historic and very, very severe public spending reduction plan. Markets are upping pressure for France/Le Pen to deliver. Swap spreads for countries like Belgium or Italy are equally widening. Echoes to the EMU debt crisis work as a drag on the single currency. The three-day rally in CHF, ending a weakening trend since the start of the Middle East conflict (rising core bond yields) is the best example of changing market narrative. EUR/CHF fell from Wednesday’s close at 0.9469 to currently 0.9285. EUR/GBP hit 0.85 for the first time since July, targeting the YtD low at 0.8455. On the euro side of the equation, upwardly surprising September inflation numbers are of no matter. Headline CPI accelerated to 0.6% M/M and 3.8% Y/Y (highest in three years time). Core CPI (2.5% Y/Y from 2.4%) and services CPI (3.2% Y/Y from 3%) both ticked up as well. Our KBC Nowcast model now expects a first 4%+ headline print in October with core CPI seen moving back to 2.4% Y/Y. EUR/USD set an intraday low at 1.1221, but below-consensus September payrolls halted the slide. Net job growth disappointed at +29k (vs 90k expected). On top June and July figures faced a cumulative 60k downward revision bringing the total miss at 121k. The unemployment rate ticked up from 4.1% to 4.2%, but that happened against a new increase in labour force participation rate (61.8% from 61.6%). US money markets trimmed October Fed rate hike bets to 20% in the wake of the release with US yields correcting 6 bps (30-yr) to 8.7 bps (5-yr) lower. The EUR swap curve bull flattens with yields 4.2 bps (2-yr) to 11 bps (30-yr) lower. Weekly charts show engulfing patterns on all tenors suggesting more room for correction/consolidation ahead.
News & Views
- UK firms in the Bank of England’s September Decision Maker Panel expect CPI inflation one year from now to be 3.3%, up from 3.1% in the August edition. A smoother three-month rolling average stood at 3.1%, the same as previously. The corresponding measures for the three-year ahead gauge stood at 2.9% (from 2.7%) and 2.8% (unch.). Firms reported that their realized annual own-price growth was 3.7% in the three months to September, unchanged vs August. The one-year ahead indicator pointed at output prices rising by 3.7% (-0.1 ppt from August) in the three months to September. Annual wage growth was reported at 4%. Firms expect a 3.4% wage growth rate one year from now, unveiling expectations for a deceleration. Realized annual employment was down by -0.2% but should have picked up by 0.2% by the same period next year.
- The United Nations Food Price index climbed two points to 136 to be at its highest level since November 2022. The index is 5.8% higher year over year but remained 15.1% below its peak reached in March 2022. Price indices for crop-based commodity groups (cereals, vegetable oils, and sugar) all increased from the previous month, while the meat price index declined and the dairy price index remained stable. Within cereals (+5.1%), wheat prices rose 6.3% m/m to a three-year high over Black Sea disruptions and North American dry weather. Maize prices added 5.6% to be at its highest price in more than 3 years, over similar Black Sea concerns as well as Hormuz shipping constraints (particularly for maize used as biofuel feedstock). Palm oil prices were the main driver in the headline category ‘Vegetable Oils’ (+1.8%) push higher. Soy and rapeseed oil prices remained broadly stable. Sugar prices rallied 6.5% over tighter supply prospects in the EU, Thailand, India and Brazil on a combination of a decline in planted areas and adverse weather conditions coupled with a strengthening El Niño. Meat prices fell 1.1%, a decline driven by lower poultry and pig meat quotations. Dairy prices were little changed on the month (-0.1%).
