Sunset Market Commentary

Markets:

UK July inflation numbers grabbed most attention this morning. Headline CPI fell slightly less than expected (-0.4% M/M vs -0.5%) with the Y/Y-figure dropping from 7.9% to 6.8%, the lowest level since February of last year. The biggest contributor were gas and electricity prices following the UK regulator’s announcement that the average annual bill would drop from £2500 to slightly over £2000. Core CPI accelerated again on a monthly basis, from 0.2% M/M in June to 0.3% with the Y/Y-number stable at 6.9%. Services inflation even accelerated from 7.2% Y/Y to 7.4% suggesting that the Bank of England’s work is far from done, even if the UK central bank slowed down its tightening pace from 50 bps rate hikes to 25 bps at the early August meeting. UK gilts underperform today with UK yields rising by 2.4 bps to 3.7 bps across the curve. Sterling holds a small advantage over the euro, with EUR/GBP down at 0.8565 from an open at 0.8585. US eco data were decent today with housing starts up by 3.9% M/M in July (vs 1.1% expected), building permits rising a gently 0.1% M/M (vs 1.5%) and industrial production increasing by 1% M/M (vs 0.3%). They help explain the underperformance of US Treasuries vs German Bunds. The long end of the US curve underperforms again, rising by up to 2.7 bps for the 30-yr tenor. Yesterday, a first attempt to push through the YTD high (10y 4.2%) on stronger retail sales failed. Real yields are driving the move with the US 10y real yield approaching 1.9% for the first time since June 2009! FOMC Minutes can tonight give more ammunition given the divergence between June FOMC dots (5.5%-5.75% EoY policy rate) and market expectations of a 5.25%-5.5% policy rate peak. EUR/USD holds steady again between 1.09 and 1.0950. The Japanese yen remains on the weak side (USD/JPY 146) following last week’s rise in core yields. The market is also stepping up pressure on the BoJ to really start normalizing its policy instead of just widening the band around the 0% target around the 10y yield (from 50 bps to 100 bps end of July). Back in September, the Japanese Ministry of Finance did its first FX interventions since 1998 at the current spot rate. They later stepped it up as USD/JPY briefly passed 150 in October. (More) verbal intervention threats will follow.

News & Views:

The Reserve Bank of New Zealand (RBNZ) kept its policy rate (OCR) unchanged at 5.5% this morning. The Committee agreed that the OCR needs to stay at restrictive levels for the foreseeable future to ensure annual consumer price inflation returns to the 1 to 3% target range, while supporting maximum sustainable employment. A prolonged period of subdued spending growth is still required to better match the supply capacity of the economy and reduce inflation pressure. In the near term, there is a risk that activity and inflation measures do not slow as much as expected. This is reflected in the updated projection path for the policy rate which slightly raised the odds of a final rate hike and pushes forward the potential start of the rate cut cycle. The expected policy rate peak was raised from 5.5% to 5.59% mid next year with end of 2024 and end of 2025 projections increased from 5.3% to 5.5% and from 4.09% to 4.51% respectively. Headline inflation isn’t expected to fall in the 1%-3% range before Q3 2024. The RBNZ also increased its neutral rate prognosis from 2% to 2.25%. NZD swap rates rose slightly at the front end of the curve (+2 bps) with NZD/USD temporary halting a month-long decline, hopelessly trying to regain lost support at NZD/USD 0.60 (previous YTD low).

Hungarian GDP shrank by 0.3% Q/Q in Q3 with YoY growth 2.4% lower. YTD, YoY GDP fell by 1.7%. The largest contributors to the decrease in the economic performance were industry and market services, within which mainly transportation and storage as well as wholesale and retail trade. The good performance of agriculture lowered the reduction. The decrease in the value added of services was partly offset by a significant growth in human health and social work activities, the performance of which approximated the level before the Covid-19 pandemic. The Hungarian forint is better bid today, ignoring the outdated numbers and core bonds yields finally relax after a week of significant increases. EUR/HUF drop back from 388 to 385. Polish GDP decreased by 3.7% Q/Q in Q2 (-0.5% Y/Y). The outcome was weaker than forecast (-2.3% Q/Q) with details being provided on August 31. Today’s Polish zloty rebound is similar to the HUF move with EUR/PLN currently trading at 4.45 from 4.48.