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Sunset Market Commentary


Investors positioned for a ‘hawkish pause’ over the previous days, with Fed Chair Powell/the governors’ summary of economic projections tomorrow seen cementing the higher for longer narrative while at the same time keeping the door open for a final rate hike in one of the two remaining meetings of the year. The ‘by default’ uptrend in yields unabatedly continues today (US 2-y yield +3 bps, 10-y +5 bps). US yields across all tenors are within striking distance of cycle peak levels (5-y testing highest level since 2007). One would expect a push beyond key technical references to be delayed till after tomorrow’s Fed meeting. However, momentum remains remarkably strong. German/EMU yields initially held near unchanged levels, but finally also joined the US momentum (+ 2-4 bps across the curve, with the 30-y (2.88%) reaching the highest level since end 2011). Recent talk on more ‘technical, non-interest rate ECB tightening’ (higher reserve ratio, faster reduction of CB balance sheet) supported the rend. In this context, UK Gilts’ outperformance did catch the eye even as a yields’ decline of 5 bps + evaporated in US trading (UK 10-y currently minus 2.5 bps). Markets still see a 80% chance of a 25 bps BoE rate hike on Thursday. However, the odds of an additional step further out have diminished to <50%. This is quite an aggressive call. Concerns on overtightening always have been an important factor in the internal BoE debate. That said, August headline inflation scheduled for release tomorrow morning is expected to reaccelerate to 0.7% M/M and 7.0% Y/Y (was -0.4% M/M and 6.8% Y/Y in July). Core inflation is seen only marginally lower at 6.8% from 6.9%. The BoE will continue to look forward when assessing the need for further tightening. Even so, only one additional inflation release will be available before the Bank will (have to) reevaluate its policy with a new in extenso Policy Report at the November 2 meeting. Persistent high inflation and the BoE sticking to only a conditional commitment to raise rates further might be a further headwind for sterling. EUR/GBP yesterday jumped above 0.86, but with no follow-through gains for now (EUR/GBP 0.8625). In other major FX cross rates the euro gains slightly further on the debate of the ECB potentially further reducing excess liquidity (1.0695). USD/JPY (147.8) is again near the 147.95 recent ceiling. An unexpected jump both in Canadian headline (4.0% from 3.3%) and core inflation (3.9% from 3.6%) propelled yields (2-y + 11 bps) and the loonie (USD/CAD 1.3400 from 1.3485 close yesterday). Maybe the current BoC pause isn’t the end of the cycle yet.

News & Views

Czech National Bank vice governor Frait said that the central bank will almost certainly keep its benchmark rate unchanged at 7% next week, while discussing the strategy for future rate cuts in depth. Even if the board agreed to lower rates in a following meeting (November and/or December), Frait thinks that money-market bets for about 70 bps of cuts this year are very unlikely to materialize. When policy easing starts, it will be slow and gradual unlike the National Bank of Poland’s 75 bps rate cut kick-off. A “fairly tight” labor market, combined with a weaker-than-expected koruna and more expensive oil are inflationary risks that warrant later and more cautious easing than implied by the central bank’s forecast, the vice governor said. CNB board member Holub in separate remarks stressed that risks to the baseline (rate cut) scenario are significant and tilted to the upside given the threat of inflation expectations becoming unanchored, risks of a wage-price spiral and longer effects of the expansionary fiscal policy. CNB governor Michl yesterday pushed back against early rate cuts as well, hinting to keep a restrictive policy until it will be certain that inflation will stay around 2%, not only in H1 2024 but also thereafter. CZK manages to hold on to yesterday’s gains, trading just north of 24.40.

The Flemish Community today raised €2.75bn in 2-part debt offering consisting of a short 9y regular benchmark (€1.25bn Jun2032) and a 19y sustainable benchmark (€1.5bn Sep2042). The 9y bond was priced to yield 37 bps above the Belgian OLO curve, down from revised guidance at +39 bps and initial price takings in the +41 bps area. The 19y bond was squeezed 5 bps from early guidance in the OLO +35 bps area to eventually + 30 bps. Order books were respectively above €5bn and above €12.7bn highlighting especially interest in the sustainable deal. The Flemish community now raised maximum objectives for both regular (€2.75bn) and sustainable benchmarks (€1.5bn) as set out on its funding plan. Short term financing and private placements (max €1.25bn) will be used to bridge the remainder of this year’s €8bn funding need.



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