NATO chief Stoltenberg said that yesterday’s missile explosion on Polish territory was probably caused by Ukrainian air defenses. An unfortunate accident, nevertheless sparked by the Russian attack against Kiev etc yesterday. By immediately taking the angle out of a potential explosive situation, both parties clearly wanted to avoid an unnecessary escalation in the conflict. Russia kept an extremely low profile attitude over the past 12 hours. From a market point of view, it put EUR/USD back on the recovery track following yesterday’s intraday, 2 big figure, meltdown. EUR/USD marched from an opening around 1.0350 toward and intraday high near 1.0435. The move stalled with Bank of France governor Villeroy de Galhau saying that jumbo ECB rate hikes will not become a new habit. If it were up to him, rates will likely reach about 2% in December, suggesting that the ECB will slowdown its tightening pace in sync with the Fed from 75 bps to 50 bps. While this seems granted for the Fed, we think the case for a 75 bps rate hike in Europe remains more than alive given the relative starting base and the fact that inflation is still setting new cycle highs on a monthly basis. EUR/USD eventually returned below the 1.04 big figure after October US retail sales beat consensus. Both headline and core sales rose by 1.3% M/M with the retail sales control group – proxy for consumption in GDP calculations — increased by 0.7% M/M (vs 0.3% expected) with the September number upwardly revised from 0.4% to 0.6%. Resilient retail sales keep the Fed in tightening mode, even if they slowdown the pace. It’s all about the peak level and about how long rates will remain restrictive, as Chair Powell indicates. Retail sales forced a spike lower in US Treasuries, with the front end of the curve underperforming. Daily US yield changes range between +0.7 bps (2-yr) and -5.1 bps (30-yr). German Bunds outperform with the curve bull flattening. Yields fall 6 bps at the front end and 10-12 bps from the 5-yr sector on. European bourses correct 0.5% to 1% today after their breath-taking comeback of late.
Sterling lost marginally ground against the euro with EUR/GBP trading above 0.8750. The move came after multi-decade high inflation failed to lift BoE rate hike bets. Inflation accelerated by 2% M/M to 11.1% Y/Y with core CPI stabilizing at 6.5% Y/Y. Tomorrow could be the big day for UK investors with the new government presenting its long term Budget plans.
The ECB in its biannual Financial Stability Review warned that risks to the financial system are rising due to a toxic cocktail of slowing economic activity, inflation, rising financing costs and lower liquidity. The cost-of-living squeeze is weighing on consumer spending as well as their ability to service debts while Europe’s worsening growth prospects threaten corporate profits. This may lead to bankruptcies and greater volatility in financial markets. The ECB said the turmoil in the UK gilt market and the earlier cash crunch that hit European energy traders is testament to the system becoming increasingly vulnerable to such sharp market moves. The report also flagged potential dangers to public finances with governments borrowing a way out of the energy crisis by an estimated 1.4% of EMU GDP. With respect to property markets, the central bank spotted signs that real-estate expansion of recent could come to an end as overvaluation and mortgage rates stand at the highest levels in more than five years.
Canadian inflation as expected stabilized at 6.9% y/y in October. The largest contributor was shelter, adding 2.06 ppts to the yearly figure. The monthly dynamic accelerated from 0.1% to 0.7% m/m on the account of the gasoline category (0.39 ppts contribution). The three different core gauges either stabilized or increased marginally compared to the September figure, bringing their average from 5.37% to 5.43%. Inflation may not have risen in October, but it did show to be very persistent. This leaves the BoC no room yet to pause the tightening cycle. Combined with the stellar labour market report two weeks ago, the central bank is set to deliver another hike at the December 7 meeting. Money markets are currently split between a 25 and 50 bps rate hike. The loonie barely budged today with strong US retail sales published at the same time keeping USD/CAD balanced at around 1.327.