UK yield markets remain a barometer for broader trends. UK yields again jump between 50 (+)bps (2-y) and 20 bps (30-y). The government’s voluntary fiscal policy aimed at supporting growth and shielding citizens’ purchasing power is on collision course with the BoE’s aim to cope with inflation via a slowdown in demand. This institutional collision between the fiscal and monetary authority triggered selling both in UK gilts and sterling. UK risk prima are mounting. Cable before the open of UK markets briefly dropped below the 1.0520 1985 low. EUR/GBP filled offers in the 0.9265 area. Tensions in FX markets gradually ‘eased’ throughout the session. EUR/GBP returned below the 0.90 handle (0.892). Some investors maybe took profit on sterling shorts as the interest rate differential makes sterling shorts more costly. Still the huge swings in Gilts suggest that the confidence crisis in the UK economy and its fiscal position is far from over. ‘Sources’ said the BoE might come with a statement later, but this isn’t confirmed yet.
The UK isn’t the only country to make difficult choices between keeping growth afloat and combating inflation. The German IFO business climate index dropped much more than expected (84 from 88.6). All subsectors (manufacturing, services, trade and construction) turned more negative both on current conditions and even more on expectations. Ifo concludes that the German economy is slipping into recession. Contrary to the market paradigm that reigned until this summer, recession fears don’t trigger expectations on CB support anymore. With September EMU and German inflation this week expected near 10%, interest rates continue their march north. EMU swap yields are rising up to 13 bps (5-y). The EMU 10-y swap yield touched 3.0% for the first time since 2011. European investors also faced the outcome of the Italian parliamentary elections as the rightwing coalition secured a majority. Markets still have to wait for details on the new coalition’s (reform and EU) agenda. Even so, with the 10-y Italian spread vs Germany rising ‘only’ 5 bps, any potential ‘Italian problem’ for now is seen as ‘secondary’ to the growth/inflation balance. US yields simply extend their uptrend rising between 6 bps (10-y) and 3/2 bps (2/30-y). Despite sharp swings on yield markets, the sell-off on equity markets is shifting into a lower gear. The EuroStoxx50 is switching between gains and losses. Still Friday’s close below the 3357 June low isn’t reversed yet. On FX markets, the dollar firmly stays in pole position after touching a new multi-year top in Asia this morning (DXY top 114.52). However, the rush on the US currency gradually eased during the day. DXY currently trades near 113.35. EUR/USD rebounds off this morning’s low at 0.9554 to currently trade near 0.9665. Even so, the EUR/USD downtrend remains firmly in place. It’s much too early to already consider the idea of some kind of an exhaustion move.
Czech September confidence indicators deteriorated further. The composite index fell from 1.7 to -2.6, the lowest since March 2021. Business confidence dropped from 9.6 to 5.2 with industry, selected service sectors and trade all contributing negatively. Sentiment in construction improved slightly. Consumer confidence crashed from -29.8 to -33.8, the lowest level since monitoring began back in 2016. According to CSO respondents are more worried about the overall economic situation and their own financial situation. The Czech National Bank on Thursday is expected to keep the policy at 7%, giving more weight to the economic backdrop than to inflation given their frontloading efforts since last Summer. The CNBis currently avoiding a weakening of the CZK beyond EUR/CZK 24.70 via FX interventions.
Belgian business confidence crashed from -5.8 to -11.8, the lowest level since November 2020. Manufacturing fell from -7.2 to -13.9, trade from -11.9 to -24.1 and building industry from -5.6 to -6. The loss of confidence was particularly abrupt in the retail sector. Demand forecasts collapsed, after having recovered in August, and those for orders placed with suppliers fell again. The downward revision of the employment outlook was somewhat less marked. Last week, Belgian consumer confidence plummeted from -11 to -27 in September, dropping below the Covid-lows of -26, to the weakest level since August 1985.