Sunset Market Commentary

Markets:

Today centered around US September CPI inflation numbers. They printed… nearly bang in line with consensus. Headline CPI rose by 0.4% M/M (vs 0.3%) while core CPI increased 0.3% M/M (in line). The headline Y/Y-figure stabilized at 3.7%. The core slowed as forecast from 4.3% to 4.1%. The disinflationary process thus runs as expected. Up until last week, these inflation numbers together with stronger payrolls figures would have backed the case of the majority of Fed governors which want to raise the policy rate one final time this year. However, the correction since the start of this week driven by Fed comments now suggest that today’s inflation data back the case for a hold at the November policy meeting. Consensus is building in the US central bank that the yield increase since the latest Fed meeting (+50 bps at one stage) and since the previous Fed rate hike (+100 bps at one stage) substitutes for that final hike. The market reaction was interesting and actually quiet similar (but opposite) to last Friday’s payrolls. Last week, bearish bond sentiment entered exhaustion stages with strong payrolls unable to push bonds below sell-off lows. This time around, we’re in (bond) correction territory with today’s in line with consensus data triggering a test of the bond rebound highs but unable to push them above. To us, this suggests that from now on, we entered a sideways trading pattern bordered by the bond sell-off lows of last week and the rebound highs of this week. In yield terms, for the US 10-y gauge we’re talking about the 4.5%-4.9% range going forward. Daily changes on the US yield curve today vary between 8 bps (2-yr) and 5.4 bps (30-yr). Germany yields shadow the trend with yields adding 4.2 bps (2-yr) to 3.4 bps (30-yr). The dollar rebounds in the same way as (US) yields with the failed test of technical resistance in EUR/USD (1.0635/43) at play as well. The pair currently trades around 1.0560. European stock markets narrowly cling to gains while US stock markets barely hold their head above water in the opening.

News & Views:

In its October monthly oil market report the International Energy Agency (IEA) sees evidence of demand destruction as US gasoline consumption fell. At the same time, buoyant demand growth in China, India and Brazil, is mentioned as underpinning an expected increase of 2.3 mb/d to 101.9 mb/d in 2023, of which China accounts for 77%. However, according to the IEA assessment, the prospect that ‘higher for longer’ interest rates could slow economic and demand growth. Growth is expected to slow to 900 kb/d in 2024, as efficiency gains and a deteriorating economic climate weigh on oil use. Global output will increase by 1.5 mb/d and 1.7 mb/d in 2023 and 2024, respectively, to new record highs, driven by non-OPEC+ growth. Overall OPEC+ output is set to decline in 2023, although Iran may rank as the world’s second largest source of growth after the United States. Voluntary cuts are expected to keep the oil market in deficit in 2023. If extra cuts are unwound in January, the balance could shift to surplus, which would go some way to help replenish depleted inventories, which tumbled sharply in August. Oil today reversed yesterday’s decline with brent rebounding to $87.40/b.

The BoE published its credit conditions survey, a mostly qualitative assessment of supply and demand conditions derived from a questionnaire at Banks and Building societies. On the supply side, lenders reported that the availability of secured and unsecured credit to households decreased in the three months to end-Aug 2023 (Q3). It was expected to decrease slightly further over the next three months or stay unchanged. Overall availability of credit to the corporate sector was unchanged. Small business availability slightly increased while availability of credit to medium and large businesses remained unchanged in Q3. Overall availability was expected to be unchanged in Q4. On the demand side, demand for secured lending for house purchases decreased which is expected to continue in Q4. Demand for overall unsecured lending (including credit card lending) increased in Q3 and is also expected to do so in Q4. Demand for corporate lending from small businesses was unchanged, but decreased for medium-sized businesses and large firms. Lenders also reported spreads for most categories of lending to have decreased in Q3. Default rates for most categories of lending were expected to rise in Q4, except for large businesses.