Sunset Market Commentary

Markets

Today’s action adds to our believe that we’ve witnessed a short term exhaustion move on markets yesterday, making way for some short term consolidation as eco data drip in. US Treasuries already staged a comeback during yesterday’s US session with European bonds catching up at the start of dealings this morning. We must add that they failed to really build on those opening gains, confirming strong underlying bearish sentiment, especially at the (very) long end of the curve these days. The more so given that September EMU inflation printed below consensus. Yesterday’s national figures already hinted in that direction. Inflation rose by 0.3% M/M (vs 0.5% forecast) with the Y/Y-figure falling from 5.2% to 4.3%, the slowest pace since October 2021. Household energy bills were the main downside force, massively outweighing higher pump prices. Core inflation slowed from 5.3% Y/Y to 4.5% Y/Y (vs 4.8% Y/Y), marking the first sub-5% reading since September 2022. Non-energy industrial goods inflation fell to 4.2% from 4.7% and services inflation to 4.7% from 5.5%. Today’s inflation figures confirm that the ECB will be able to at least skip a rate hike at the end of October policy meeting. The jury remains out on possible finetuning hikes at the end of the year or in Q1 2024 though. ECB Kazaks this morning indicated that rates will stay on hold for a while. ECB Vasle questioned how ECB policy is reaching the economy. Growth is slowing but the labour market remains strong. ECB Vujcic sounded also more cautious than Vasle on how things will proceed given uncertainties ahead. German yields lose 5.4 bps to 9.4 bps at the time of writing with the belly of the curve outperforming the wings. Intraday action in US Treasuries was more or less similar. A batch of near-consensus US eco data didn’t alter that. Personal income and spending both increased by 0.4% M/M in August. Headline and core PCE deflators rose a tad less than forecasted (0.4% M/M & 3.5% Y/Y for headline and 0.1% & 3.9% Y/Y) but August figures faced an upward revision. US yields currently lose 3.3 bps to 6.5 bps with the belly performing best as well. Lack of agreement on spending bills in US congress risks ending in a government shutdown after the weekend, but this isn’t a source of market concern at the moment. Consolidation is ongoing at FX and stock markets as well. The trade weighted dollar loses the 106 big figure again with EUR/USD above 1.06 after a test of the high 1.04 support area earlier this week. Both paint (inverted) hammer formations on the weekly technical charts after failing to pierce respective upper (DXY) and lower (EUR/USD) bounds on rising/declining trend channels. European stock markets rebound over 1% with key US indices opening 0.2-1.2% higher. Similar inverted hammer patterns are visual on the weekly charts.

News & Views

Polish inflation was 0.4% lower in September compared to August. Y/Y inflation dropped substantially from 10.1% to 8.2%. In a monthly perspective, food and non-alcoholic drinks (-0.4%), electricity, gas & other (-0.8%) and fuel prices (-3.1%) supported the decline in the price index. Details on other subcategories will only be available at the update later next month. However, core/services inflation probably eased at a slower pace. The National Bank of Poland at its early September meeting surprisingly cut the policy rate from 6.75% to 6.0% as it anticipated a further fall in inflation in the months ahead. Markets are now pondering whether there is already room of additional easing when the NBP meets next week (Wednesday). They currently anticipate at least an additional 25 bps step. The Polish 2-y swap yield (4.51%) currently eases 4 bps in a daily perspective, but that is also driven by the trend in core EMU yields. The zloty showed some volatility around the release, but currently trades little changed near EUR/PLN 4.63. In the days after the September decision, the zloty dropped more than 4% against the euro.

Data from the Swiss National Bank showed that it stepped up sales of foreign currency in the second quarter of this year. It cut its balance sheet by an equivalent of CHF 40.3bn, up from CHF 32.2bn in the first three months of this year. In doing so, the SNB strengthens its Swiss franc, helping the central bank in its quest against inflation. Earlier this month, the SNB kept rates unexpectedly steady at 1.75% but held on to stating that “in the current environment, the focus is on selling foreign currency.” The status quo triggered a minor CHF correction that brought EUR/CHF to levels of 0.966 currently. We think the SNB won’t be bothered by this recent weakening, as it offers its ailing manufacturing sector some relief.