Rates: German 10-yr yield to close above key 0.52%?
Italian party leaders convinced technocrat FM Tria into granting more fiscal leeway next year which risks triggering downgrades by Moody’s and Fitch. BTP’s will suffer in the opening, providing a bid for the Bund. Inflation numbers in EMU and the US could limit the upside though. We expect the German 10-yr yield to close above the key level of 0.52%.
Currencies: Will higher EMU inflation block post-Fed EMU decline
The reaction of the interest rate markets and the dollar to Fed decision was slightly different. The dollar gained traction even as US yields stayed relatively immune. The euro suffered from uncertainty on Italy and ignored higher German inflation. Will this pattern be confirmed today or will a jump in EMU inflation finally give the euro some downside protection?
The Sunrise Headlines
- US equity markets closed yesterday’s trading session in green, with technology shares outperforming (NASDAQ +0.65%). Asian exchanges are mostly gaining ground as well, with Japan and China outperforming (around +1%)
- Italy’s ruling populist parties, Five Star Movement and the League, have convinced Finance Minister Tria into providing more funds for their election promises, agreeing on a budget deficit target at 2.4% of GDP in 2019.
- Iran is ready to accept international rules on financial crimes to tackle money laundering and terrorism financing. The country is seeking new ways to maintain connections to the global financial system as the US still imposes sanctions.
- The EU is preparing a five-day plan to cope with the consequences of a no-deal Brexit. The plans contains temporary fail safes to prevent chaos. However, Brussels made clear it still hopes to strike a deal with the UK.
- Japan printed strong eco data .Core inflation rose unexpectedly to 1.0% (YoY) in September. Jobless rate fell from 2.5% to 2.4%. Industrial production grew softer (0.6% YoY), but retail sales noted the fastest rise in 8 months (0.9% MoM)
- German Chancellor Angela Merkel will have talks with Turkey’s President Erdogan today and tomorrow. Both countries are seeking to repair relations, a year after Erdogan accused Germans of using Nazi methods.
- Today’s eco calendar contains the PCE Deflator and the Chicago Purchasing Manager index for the US and the aggregate EMU inflation number for September. BoE’s Ramsden and Fed’s Williams speak today
Currencies: Will Higher EMU Inflation Block Post-Fed EMU Decline
Will higher EMU inflation block euro decline?
Yesterday, the dollar gained traction during the day. US interest rates and the dollar didn’t rise on Wednesday even as the Fed signaled further gradual rate hikes. US yields still stayed away from recent peaks, but the dollar was in better shape. At the same time, the euro struggled, pressured by uncertainty on the Italian budget. FX markets were also a bit selective in their assessment. German inflation was much higher than expected, but didn’t help the euro despite hawkish inflation comments from ECB’s Draghi of late. Later in the session, the Italian government agreed on a 2.4% budget deficit. EUR/USD finished the session at 1.1641, almost at the session low. USD/JPY cleared 113.17 resistance and closed the day at 113.38. Overnight, Asian equities mostly show modest gains. Korea underperforms. EUR/USD hovers near recent lows (1.1640 area) as Asian markets await the European reaction to the Italian budget agreement. This time, USD strength doesn’t cause any material unrest amongst Asian EM currencies. The yen declined further even as most Japanese eco data (including inflation) were mostly higher than expected. USD/JPY is changing hands in the 113.50 area. Today, investors look out whether yesterday’s rise in German inflation will also be copied in other countries and in the EMU CPI. We are keen to see whether it will raise EMU interest rates or the euro. At the same time, European markets will also make their assessment on the Italian budget. In the US, PCE/PCE deflator and the Chicago PMI have market moving potential. Italy remains a wildcard, but we assume that yesterday’s euro decline will at least temporary slow if (especially core) EMU inflation would jump sharply higher. In LT perspective, we maintain the view that Fed-guidance on a (protracted) continuation of the hiking cycle should protect the USD downside. It won’t be easy for EUR/USD to rebound beyond 1.1815/1.1851 ST. The technical picture of USD/JPY improved, but we are not convinced that this rally will continue.
Yesterday, sterling mostly followed the broader moves in the euro and the dollar. EUR/GBP dropped below the 0.89 big figure and trades still in that area this morning. Today, UK eco data (current account final Q2 growth) probably will only be of second tier importance for sterling trading. BoE’s Ramsden will speak. The conservative Party Conference early next week is the next political milestone
EUR/USD tumbles back lower in the range on USD strength and uncertainty on Italy
