Sunset Market Commentary

Markets

It’s difficult to interpret today’s developments. Up until last week, markets would have rallied on slightly lower German (0.2% M/M & 4.3% Y/Y vs 0.3% & 4.5% expected) and Belgian (see below) inflation figures. In the same way, they would have concluded from an (outdated) revision to US Q2 GDP (consumption 0.8% Q/Qa instead of 1.7%) that central banks are done and will soon leave peak levels behind. Today’s releases didn’t have that impact. They were balanced by accelerating Spanish inflation (0.6% M/M from 0.5% M/M) and extremely low US weekly jobless claims (204k from 202k). On top, oil prices rallied from $92/b on Wednesday to $97.5/b this morning ($96/b currently). The fact that core bonds continue to sell-off in such an environment is very telling about underlying market sentiment with higher real rates and rising risk premia in the driver’s seat. The strength of today’s sell-off makes us nevertheless question whether we’re witnessing a short term technical exhaustion move or not. Daily changes on the German yield curve today vary between +5 bps (2-yr) and +10 bps (10-yr). The German 10-yr yield obviously reaches a new cycle peak above 2.9%. The EU 10y swap rate took out the 2022 top at 3.41%, taking a shot at the psychologic 3.5% mark. The Belgian 10y yield broke that mark for the first time since early 2012 (3.6% currently). The Italian 10-yr yield spread over Germany touches 200 bps for the first time since early this year with deteriorating public finances (2023 & 2024 deficits revised to 5.3% of GDP and 4.3% respectively) adding to the real yield rally. Daily changes on the US yield curve range between -3.2 bps (2-yr) and +5.7 bps (30-yr). Chicago Fed Goolsbee warned that tying monetary policy too closely to labor and GDP risk triggering an overshoot in policy rates. He believes that it is well possible to curb inflation without having a deep recession. Today’s bond sell-off doesn’t translate into hemorrhage at bourses, though their performance remains unconvincing (Europe flat; WS small opening losses). EUR/USD for a second straight session tried to move south of 1.05, but the YTD low at 1.0484 remains intact for now.

News & Views

Belgian statistical agency (Statbel) reported that the Belgian consumer price index declined by 0.69% M/M in September, reducing the Y/Y measure for headline inflation to 2.39% from 4.09% in August. The Y/Y figure marked the lowest level since July 2021. Core inflation, which does not take into account price evolutions of energy products and unprocessed food, stood at 6.95% in September, compared to 7.70% in August and 7.88% in July. Inflation for services more or less stabilized at 7.18% from 7.25%. Inflation for rents eased from 6.14% to 5.33%.The main monthly price increases in September concerned alcoholic beverages, motor fuels as well as travels abroad and city trips. However, plane tickets, confectionery, bread and cereals, hotel rooms, natural gas, vegetables, meat, non-alcoholic beverages, fruit and dairy products have had a decreasing effect on the index. The data published are according to the domestic methodology. Statbel indicated that a first estimate according to the European harmonized index (HICP) for Belgium amounts to 0.7% in September

Joined economic forecasts of five major economic institutions suggest that Germany’s GDP will contract by 0.6% this year, a strong downward revision from an expected growth of 0.3% seen in the spring forecast. According to Oliver Holtemöller of IWH, the most important reason for the revision is that industry and private consumption are recovering more slowly than expected. Recent indicators suggest that production fell again noticeably in the third quarter of 2023. However, the institutes’ forecast of 1.3% for 2024 is only 0.2 percentage points below their spring forecast. The institutes argue that wage increases have followed the price hikes, energy prices have fallen and that exporters have partially passed on their higher costs, so that purchasing power is returning. Therefore, the downturn is expected to subside by the end of the year. In the following years the institutes expect a decreasing growth potential due to a shrinking the labour force becoming more apparent. The number of unemployed people is expected to increase moderately to 2.6 mln in 2023 (was 2.42 mln in 2022), but the number might already again decrease in 2024. With respect to inflation the forecast sees inflation declining from 6.1% this year to 2.6% in 2024%. Core inflation is forecasted at 6.1% and 3.1% respectively.