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Sunset Market Commentary

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Some inflation readings of individual European countries today provided a taste of what to expect from the euro area wide figure tomorrow. French inflation accelerated from 2.4% y/y to 2.7% (vs 2.8% expected), matching the pace seen in 2011. Italian HICP fastened from 2.5% y/y to 3%, a 9-year high. In Germany, finally, prices rose a whopping record-breaking 4.1% y/y (vs 4% expected), up from 3.4%. Details are unavailable as of yet but what is clear is that the notion of “temporary” inflation needs another stretch into time. The eurozone figure tomorrow is estimated at 3.3%, which would be the strongest since September 2008. Today’s readings tilt the balance of risks in favour of a mild upward surprise which in turn spurs some market speculation on central bank action, even as Lagarde stuck to the temporary narrative at the ECB forum these past two days. German yields gapped higher at the open before paring gains soon thereafter along with a dwindling equity sentiment (EuroStoxx50 turned a 0.9% gain into a 0.3% loss). Slightly stronger-than-expected inflation later helped yields bottoming out again though on the back of real yields. The curve eventually bear steepens with changes varying from 3.1 to 3.6 bps at the long end of the curve. The 10y yield stays north of -0.20% resistance/support. US Treasuries outperform slightly. (Secondary) US jobless claims disappointed with a 362k increase vs a 330k consensus but largely went unnoticed. The curve steepens nonetheless, seeing yields change 0.8 bps (2y) over 2.4 bps (5y) to 3 bps (30y).

On FX markets the trade-weighted dollar eased for a first time in four days. DXY’s rally ran into resistance at 94.47, the crucial barrier that’s effectively the final hurdle before a return to the 96 area. EUR/USD finished below 1.1603 support yesterday and extended losses today. The pair is trading further sub 1.16 (1.1584 currently). The technical charts do not look good with a sustained break paving the way towards the 1.15 zone. USD/JPY (111.86) is taking a breather after rallying from the low 109 area to 112 in just six days. Sterling is performing better after a two-day whammy. Cable is still trading south of resistance around 1.35 but is up for the day from 1.3427 to 1.347. A weak euro is barely holding on to the EUR/GBP 0.86 big figure, a level it had taken out just two days ago.

News Headlines

According to the Minutes of the September meeting of the National bank of Poland, two motions to raise interest rates were rejected. One proposed to raise the reference by 15 bps tot 0.25%. Such a motion was already proposed at the policy meetings in June and July. This time also another minority motion proposing to take bold action by raising the reference rate to 2.0% was rejected. The majority still held the view that the interest rate should be kept unchanged. The results of the November projection of inflation and GDP were pointed out as being important. Should the uncertainty about the impact of the pandemic the economy subside and forecasts suggest a continuation of favourable economic conditions and the risk of inflation running above the NBP’s inflation target in the coming years, it could be warranted to consider adjusting monetary policy. Today, GUS statistical officed said that Polish average corporate gross wages rose by 8.0% Y/Y in the first half. This was only 5.8% over the same period last year.

The Czech central bank again delivered a hawkish surprise at its policy meeting today. Of late, the central bank warned that it could step up the pace of rate hikes after its started a hiking cycle with two 25 bps rate hikes in June and July. The market for today’s meeting expected a 50 bps rate hike, but the CNB doubled the repo rate to 1.50%.  The CNB will comment the decision at news conference later today. An unexpectedly sharp rise in August inflation from 3.4% to 4.1% probably was an important factor. The Czech krone reversed recent risk-off driven correction and strengthened to EURCZK 25.33.

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This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

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