Markets had to rely on their own internal dynamics/technical considerations yesterday given the empty eco calendar. Both US and EMU yields initially hovered close to post-Fed peak levels, but forces of gravity came into play during the US trading and finally inspired some global dovish repositioning. Markets are still in doubt whether the Fed will be able to continue exclusively prioritizing inflation while plenty of other central bank colleagues already shifted to a more balanced approach between taming inflation and preserving economic growth. An at that point potential Republican victory in the US mid-term elections maybe also supported the dovish intraday twist as it reduces the probability of more fiscal stimulus. US yields declined between 9.4 bps (5-y) and 4.4 bps (30-y). The $40bn US 3-y Note action attracted solid demand. The German yield curve bull flattened with yields dropping between 3.7 bps (5-y) and 8.2 bps (30-y). EMU swaps slightly outperformed Bunds. After the European close, ECB Wunsch said that ‘if the economic slowdown is shallow and accompanied by a further rise in inflation & inflation expectations, real rates will have to move above the market consensus. Markets currently see a policy rate peak near 3%. As was the case over the previous days, the mildly dovish post-Fed/post-Payrolls market tenure provided more relief for equites with US indices gaining between 1.02% (Dow) and 0.49% (Nasdaq). Admittedly, the end-of-session gain occurred amid sharp intraday swings. The ‘risk-on’ kept the dollar in the defensive. DXY closed almost at the 110.59 support (end October low). A break would take some further shine off the US currency. After a hesitant start, EUR/USD fiercely recaptured parity to close at 1.0074. Sterling gained modestly against the dollar (cable close 1.1544), but lost marginally against the euro (close EUR/GBP 0.8726).
Asian equities show a mixed picture this morning with China and Japan trading in red. Markets don’t draw firm conclusions from the outcome of the US mid-term election. The Democrats have a good chance of maintaining the Senate. US yields are rising 1-2 bps. The dollar gains marginally (DXY 109.76; EUR/USD 1.0062). The eco calendar is almost empty. Markets will have to continue their countdown the tomorrow’s US CPI release. After the recent solid performance of CE currencies, we keep an eye at the Hungarian CPI (21% Y/Y) and at the interest rate decision of the Polish central bank. Economists are divided between a 25 bps rate hike (to 7%) or an unchanged decision. Core yields probably are capped by recent highs going into the US CPI. EUR/USD 1.0094 resistance is within reach.
Chinese consumer inflation dropped from 2.8% to 2.1% y/y in October, driven amongst others by decelerating food prices from 8.8% to 7%. Core inflation steadied at 0.6% and service prices edged down to 0.4% from 0.5% the month before in a sign of zero-Covid driven demand pressure. Highlighting the disinflationary trend in China, producer prices turned negative (-1.3% y/y) for the first time since late 2020. Mining was the biggest drag on the PPI number, faltering 6.7% y/y. It follows declines in global commodity prices including an 18% drop in iron ore. The Chinese yuan eases a tad against the dollar this morning. USD/CNY trades at 7.248, up from 7.23. The intraday cycle/15 year high stands at 7.32.
The European Commission will propose changes to the debt rules later today. The current rules stipulate that euro zone countries must cut debt every year by 1/20th of the excess above 60% of GDP. This has become unrealistic for countries including Italy and Greece which saw debt soaring to 148% and 186% following the pandemic and energy crisis. Instead of a one-size-fits all rule, each country would agree on its own four-year debt reduction plans (which may be extended to seven years) with the EC, to be signed of later by other EU finance ministers, officials said. There would be limits on primary expenditures though and keeping budget deficits below 3% would still be required. Fines for breaches would be lowered but more easily applied, they added.