Markets
There’s a new word in town: “shortflation”. ECB’s Villeroy described the current economic environment like that in a Bloomberg interview, resisting the increasingly popular idea of stagflation. The economy is still strong and robust, he argued, while inflation is mostly transitory. On the ECB’s bond buying, Villeroy said some of PEPP’s flexibility should be kept in the “virtual toolbox”, for example as a contingency option to be used in times of stress. This could be one of the features of the new ECB buying scheme it is due to announce at the December policy meeting. Villeroy’s comments followed ECB Wunsch’s earlier (see below) but were largely overlooked by markets since they came around the timing of US retail sales. Joe Sixpack spent more than expected in September. Headline sales advanced 0.7% m/m (vs -0.2% expected) and came on top of an upwardly revised 0.9% in August. The value of sales in all but two out of 13 categories rose. Core sales aka the control group (ex. car sales, building materials, gas stations, office supply stores, mobile homes and tobacco stores) rose a consensus-beating 0.8% m/m after an already stellar 2.6% last month. While strong on the face of it, some (justly) note that goods categories heavily outweigh services in the US series and say rising coronacases in August/September has shifted spending to the former, possibly distorting the image. Anyway, this nuance didn’t prevent US yields from extending their intraday rise and neither did a disappointing NY Empire Manufacturing (from 34.3 to 19.8). The curve bear steepens with the belly of the curve underperforming wings. Changes vary from 2.5 bps (2y) over 5.4 bps (10y) to 4.4 bps (30y). With today’s move included, the 10y managed to half weekly losses. The same holds (more or less) in Germany. The aggressive two-day bull flattening reversed. The 10y found support near the lower bound of the upward sloping trend channel and rises 3.1 bps. Other changes range from 1.6 bps (2y) to 5.1 bps (30y). Despite having declined more, European swap yields recover a bit less (0.6-3 bps). Equity sentiment is a bit less buoyant compared to yesterday. European stocks add >0.5% and Wall Street opens 0.3-0.7% higher. Solid earnings take investor’s minds off slowing growth and high inflation for the time being, even as commodities including oil do rise further (Brent +1%, nearing $85/barrel).
Three things stand out on FX markets but not all of them are that easy to explain. One: JPY hugely underperforms. This shouldn’t come as a big surprise given the jump in yields today. USD/JPY surpasses the 114 mark for the first time since end 2018. EUR/JPY recovers 132(.73), the highest level since June. EUR/USD is going nowhere near the 1.16 pivot. The Norwegian krone (two) thanks to oil is the G10 top performer (EUR/NOK 9.75) along with the pound (three). This is where it gets trickier: we’ve seen no specific trigger for sterling. Technical considerations definitely played a role though with EUR/GBP (0.844) forfeiting 0.847 and even important 0.845 support at the time of writing. A weekly close is needed for confirmation and would surely improve the technical picture.
News Headlines
German Social Democrats (SPD), the Greens and the liberal Free Democrats (FDP) agreed on the basic principles for a ruling coalition. Joint talks only started a week ago. Formal negotiations to hammer out the details start next week. The SPD and the Greens accepted FDP’s demand to safeguard the country’s constitutional debt limits and to refrain from imposing new taxes. The Greens no longer push for speeds limits on the highway. The coalition wants to unleash Germany’s biggest industrial renewal in a century, including accelerating its exit from coal and modernizing manufacturing, according to the likely next Chancellor, SPD leader Scholz.
National Bank of Belgium governor Wunsh prefers to err on the side of not changing the ECB’s instruments too often. The comments come as the ECB tries to figure out how the post-PEPP world will look like. Other governors already floated the idea of creating a new bond buying programme to coexist next to APP and to absorb the sudden stop of PEPP buying. Another possibility would be to transfer some of the flexibility of PEPP into APP. Overall, Wunsh does remain ally of a very supportive monetary policy.
