Markets
Global core bonds eked out gains today with German Bunds outperforming US Treasuries. The first upleg resulted from Italian-related safe haven flows. Technocrat FM Tria last night agreed to give the Lega-5SM coalition more budgetary leeway than agreed with Europe. The move risks triggering rating downgrades by Moody’s (Baa2) and Fitch (BBB). Italian yields increased by 32 bps to 42 bps in the 2-10yr sector with the belly of the curve underperforming. The Italian stock markets loses more than 4%. The Bund gained more pace after disappointing EMU core inflation (0.9% Y/Y from 1% Y/Y vs 1.1% Y/Y expected) which clinched with ECB President Draghi’s comments earlier this week about a vigorous (core) inflationary pressures ahead. Two technical elements – the German 10-yr yield’s return below 0.5% and end-of-month extension buying – complete today’s story. US PCE core (2% Y/Y) and headline (2.1% Y/Y) inflation matched forecasts across the Atlantic. German yields lose 3.4 bps (2-yr) to 7.3 bps (10-yr) at the time of writing. US yield decline between 1.5 and 2.0 bps across the curve. Peripheral yield spread changes vs Germany increase by 42 bps for Italy, 24 bps for Greece, 8 bps for Portugal and 7 bps for Spain.
Today, the political agreement on the Italian budget deficit dominated global trading. Italian and European equities, Italian government bonds and the euro were sold aggressively as the Italian government allowed a bigger than expected 2019 deficit (2.4% of GDP). EMU headline inflation was as expected (2.1% Y/Y). Core inflation declined to 0.9% j/j. Especially the latter was a surprise after higher than expected German inflation yesterday. However, it was only a secondary negative for the euro. Italy-driven euro selling dominated. EUR/USD traded in the mid 1.16 area at the start of European dealings, but started an almost uninterrupted decline during the morning session, reaching an intraday low in the 1.1570 area. Selling became less aggressive as US investors joined. US data spending and income data (including deflators) were marginally softer than expected but no issue for (FX) trading. EUR/USD (1.1585 area) stabilizes within reach of the intraday low. The yen is trading remarkably soft. USD/JPY (113.50 area) hardly ceded any ground despite the overall risk-off. In addition, the BOJ indicated that it will reduce buying of bonds with a maturity longer than 25 year. For now, the higher yield on these maturities isn’t enough to attract additional yen buying.
As was the case yesterday, cable and EUR/GBP mainly followed the broader trends of the dollar and the euro. EUR/GBP drifted further below the 0.89 big figure. However, the sterling ‘outperformance’ was hampered by disappointing UK eco data (current account deficit, weak Q2 business investment). EUR/GBP trades in the 0.8890 area. Cable is drifting back south in the 1.30 big figure. Markets are looking forward to the Party conference of the Conservative Party starting in Birmingham this weekend.
News Headlines
Despite the strong German inflation numbers of yesterday, today’s EMU aggregate inflation printed lower than expected. Headline inflation (Y/Y) rose from 2.0% in August to 2.1% in September. The rise is largely due to higher food and energy prices, shown by the unexpected decrease in core inflation to 0.9% Y/Y, from 1.0% Y/Y.
US inflation numbers remain near the Federal Reserve’s 2% target. The PCE deflator (Y/Y) rose 2.2% in August, a small fall from the 2.3% in July. Core inflation (Y/Y) increased 2.0%, which is stable with the month before. Consumer spending grew only 0.3% (smallest gain in six months), from 0.4% in July. Incomes rose 0.3%, while 0.4% expected.
Italian president has asked his Finance Minister Tria not to resign over his failed attempt to keep Italy’s 2019 budget deficit within the 1.6% limit. Tria already indicated he will stay on to avoid market uncertainty. Deputy PM Di Maio said Italy must dialogue with Europe and remains confident that the country’s debt will fall, despite the higher deficit.
