Markets
- It’s back to square one for French bonds and the euro. Both asset classes enjoyed some reprieve yesterday, supported by the aggressive fiscal consolidation RN’s Le Pen plans should she win next year’s presidential elections. But many open questions remain as to how exactly the poll-leading Le Pen is going to pull off a deficit reduction to 3.7% next year from 5.4% this year and to 2.2% by 2032. Yesterday’s OAT-swap spread narrowing was a short-term sigh of relief after an exponential rise, aided in a daily perspective by easing energy prices and a bullish risk sentiment. Today things have turned around again with the French spread bouncing 13 bps to just shy of the record highs set a few days ago. Tuesday’s other helpful elements went in reverse as well. Brent oil hit an intraday high of $102/b with the Middle East conflict returning to the fore now Iran is upping naval attacks again. Refined products including diesel bounce higher too, as do gas prices (Dutch TTF €77.7/MWh). European stock markets slide up to 1.8% in the likes of the EuroStoxx50, which currently loses the critical 6200 support zone. Losing it implies a return to 6K (50% retracement on the 2026 YtD low to high) at a minimum from a technical point of view. The French CAC40 is closing in on the YtD low, clearly underperforming the broader European index. The common currency suffers a heavy blow. EUR/USD more than wipes out yesterday’s unconvincing gains to attack Monday’s 1.5-yr trough around 1.116. Similar euro weakness pushed EUR/GBP a first time below the July low of 0.8455 to form a new 2-yr low at 0.844. The pair is currently trading around 0.846. The Swiss franc probably serves as the best European risk gauge and strengthens towards EUR/CHF 0.93.
- The yield increase isn’t limited to France (or Belgium, Italy and other countries suffering the same budget disease) though. Bunds and Treasuries also drop. The sell-off led by the long end of the US curve produced new 2002 highs for the likes of the 10-yr (5.34%) and 30-yr (5.72%). It makes tonight’s $39bn 10-yr Note auction all the more interesting. Disappointing metrics are sure to send more triggers to an already wobbly bond market. German rates shed 5 bps at the front but rise 4 bps at the longest maturities. UK gilts vastly underperform their German and US peers. Yields shoot up between 5 and 11 bps in bear steepening. The 30-yr hits a fresh 28-year high above the psychologically important 6% barrier. It’s a financial blow to the Burnham administration, which is currently preparing next year’s budget. Its presentation is scheduled for October 28.
News & Views
- Hungary’s September CPI slowed to 1.56% YoY, undershooting both market expectations and our 1.76% YoY nowcast. The downside surprise was driven primarily by food prices, which recorded a second consecutive month of zero month-on-month growth despite rising PPI’s, stronger farm-gate prices and improving price expectations. Fuel prices rose 1.71% MoM. Services inflation developed broadly as expected, increasing 0.46% MoM and signaling a return to more normal pricing dynamics after the stronger summer readings. Goods inflation was broadly in line with expectations. A small downside surprise in durable goods was largely offset by firmer clothing prices. Looking ahead, rising retail price expectations, higher producer-price inflation and the weaker forint should support a move from the negative summer readings towards flat or slightly positive monthly goods inflation. Our in-house KBC Nowcast model now puts October CPI at 1.81% YoY. Further ahead, we continue to expect inflation to move gradually higher, reaching around 2.25% YoY by December, driven mainly by higher fuel prices. Hungarian swap rates initially ticked lower, but later followed the global move up. The forint trades a tad weaker at EUR/HUF 366.30.
- The Swedish September flash CPI was slightly below consensus. Headline inflation increased by 0.9% M/M to 1.1% Y/Y (from 0.3% vs 1.2% consensus). The preliminary inflation rate according to the CPIF (Consumer Price Index with fixed interest rate and the Riksbank’s favourite gauge) increased from 0.7% in August to 1.5% in September. The monthly change for the CPIF was 0.9%. CPIF without energy rose by 0.1% M/M to stabilize at 0.5% Y/Y (vs 0.3% & 0.7% consensus). Details will be published next Wednesday. Today’s numbers keep Riksbank rate hike bets by year-end in place (fully discounted). The SEK holds the upper hand against the euro. The Swedish central bank’s turn towards rate hikes and genuine euro weakness helped EUR/SEK last week away from technical resistance at 11.33 (July 2025 high) to currently change hands at 11.22.
