De-escalation Narrative Could Still Color Trading Today

Markets

Markets kicked off the week in good spirits. Betting on a US led de-escalation of the conflict in the Middle East, stocks bounced 0.3% in Europe and up to 1.2% in the US (Nasdaq). Core bonds pared last week’s gains, pushing yields in the US 4.3 to 10.5 bps higher with the long end underperforming. Germany followed by adding 1.7-6.6 bps in a similar curve shift. ECB’s Lane in an interview published after-market said the central bank must be open to further action if new shocks emerge that are sufficiently large or persistent. He added that rate cuts are still “quite some distance” from now. FOMC voting member Harker repeated his preference for keeping rates steady for a while at the current elevated levels. Both oil (on supply fears) and gold (safe haven flows) took a breather from Friday’s surge. The US dollar was sold against all majors. DXY fell from 106.579 to 106.243. EUR/USD added half a big figure to close at the day’s highest at 1.056. Sterling settled back above GBP/USD 1.22 with some minor knock-on effects on EUR/GBP (slightly lower close, at 0.8643). BoE chief economist Pill in a speech kept a balanced tone between not being complacent but wanting to avoid overtightening as much of the rate increases still have to pass through.

Asian stock markets copy paste WS’s performance. South Korea (+1.1%) outperforms in a quiet trading session. The kiwi dollar risks losing NZD/USD 0.59 on weaker-than-expected Q3 inflation (see headline below). The Aussie counterpart enjoys some bids following minutes from the previous RBA meeting. They included a new phrase which states that the RBA has a low tolerance for a slower return to the inflation target than currently expected. AUD/USD rises to 0.6354 though gains were bigger earlier. The US dollar is in a slightly better place than yesterday. Core bonds extend Monday’s decline with US cash yields in many cases already back above the levels prior to Friday.

We think the de-escalation narrative could still color trading today, keeping (long-term) yields on an upward path within their sideways trading ranges. The upper bound is capped at 3.02% in Germany and 4.88% in the US (10-y). A gentle risk-on mood is usually USD-negative but it being this fragile we don’t expect it to weigh (substantially) on the greenback. The economic calendar contains US retail sales. Barring a major downside surprise it shouldn’t interfere with the current market trends. This morning’s UK’s labour market report was an incomplete one with official employment growth and unemployment rates only due by next week. For now, we only see wages (ex-bonus) growing bang in line with expectations (7.8% y/y in the three months through August) and an early September employment growth gauge missing expectations (-11k vs +3k expected with the previous figure revised downwards). Sterling erased a kneejerk move lower to trade unchanged around EUR/GBP 0.865 in a first reaction.

News and Views

Inflation in New Zealand printed softer than expected in Q3 even as the pace of quarterly price rises accelerated and inflation remains well above the 1-3% target of the Reserve Bank of New Zealand. Headline CPI rose 1.8% Q/Q, reducing the Y/Y measure from 6.0% to 5.6%. Tradable goods inflation rose 1.8% Q/Q and 4.7% Y/Y (from 5.2%). Prices of non-tradables increased 1.7% M/M and 6.3% (down from 6.6%). Transportations costs jumped 7.1% Q/Q and contributed almost 1 ppt to the monthly rise. Housing and utilities costs rose 1.7% Q/Q. Prices of recreation and culture were 0.8% higher compared to the previous quarter. Healthcare costs declined 1.0% Q/Q while food prices gained 0.9% Q/Q. The 5.6% Y/Y inflation marked the lowest level since Q3 2021 and was also below the RBNZ expectation for inflation around 6.0%. The RBNZ at its early October policy meeting kept its policy rate unchanged at 5.5%. Markets after the publication of the data reduced expectations for a potential final rate hike at the November meeting to below 20%. The 2-y government bond yield declined 3.2 bps to 5.6%. NZD/USD declined from the 59.3 area to currently 59.00.

In interview at the IMF and World Bank annual meeting in Marrakech covered by the Financial Times, French finance Minister Lemaire was quoted that France was prepared to step up spending cuts and to pursue further structural reforms as rising bond yields are forcing governments to reduce deficits. In concreto, Le Maire indicated that he would try to add €1 bln of extra spending cuts in addition to the €16 bln of measures that were already set out in the 2024 budget proposal last month. The 2024 budget sees a deficit of 4.4% GDP and the deficit is only expected to fall below the EU’s 3.0% target by 2027.