Sunset Market Commentary

Markets

“5% or not for yields across the entire scope of the US yield curve?”, that was the question for US bond markets today. Despite global (geopolitical and economic) uncertainty, there is still no safe haven run on US Treasuries. The wings (2-y 5.25% and 30-y 5.05%) already surpassed the 5% psychological barrier. A speech of Fed Chair Powell scheduled after finishing this report complicates an ‘unchained’ market reaction. US yields traded 3-5 bps higher in the run-up to the US data. The October Philly Fed index improved slightly less than expected from -13.5 to -9. However, especially subindices on current situation confirmed the picture of a resilient economy. US weekly jobless claims unexpectedly dropped below the 200k barrier (198k, lowest since January). Admittedly, these are not the most important data. Still it was a bit strange to see yields easing slightly post the release. Let’s call it Powell’s shadow. US yields currently add between 0.5 bps (2-y) and 3 bps (5-30-y). We assume Fed Chair Powell to join the assessment of the majority of Fed speakers of late. Vice Chair Jefferson and others indicated that the Fed could continue a wait-and-see approach at the November meeting. The US economy (domestic demand and the labour market in particular) remains stronger than what is needed to bring supply and demand to a balance that will allow inflation to return to target in a sustainable way. Inflation also remains sticky with higher oil prices posing additional upside risks. Still, it is likely that Powell will join his lieutenant indicating that recent rise in yields has done part of the Fed job’s, buying them time to make a new in depth assessment when new forecasts are available at the December meeting. Looking at recent price action, it’s far from sure such a ‘benign neglect’ attitude will trigger a U-turn in the ascent in LT yields. To be continued. In a session devoid of important news on this side of the Atlantic, changes in German yields currently are less than 1 bp. After a poor start, Eurostoxx 50 trades with a small loss (-0.2%) US indices opened marginally stronger. (Brent) oil stabilizes near $91/b.

A bit in lockstep with US Treasuries, the dollar still fails to fully play its safe haven role in times of uncertainty. DXY eases slightly to 106.30 in a technically insignificant move. Idem for EUR/USD. The pair (1.0575) reversed yesterday’s decline but first resistance at 1.064 stays out of reach. USD/JPY is still paralyzed in a tight range close to, just below 150. Interesting price action in sterling. Trying to overcome the EUR/GBP 0.8706 range top, the UK currency touched the weakest level against the euro since end May. Markets aren’t convinced at all that higher than expected September inflation will cause the BoE to resume its anti-inflation campaign at the November meeting after taking a pause (at 5.25%) last month. UK retail data to be published tomorrow might decide on the EUR/GBP break.

News & Views

Polish president Duda will meet with parliamentary leaders next week Tuesday and Wednesday following the elections of last weekend, his office communicated today. Poland and its watchers are keen to know who Duda will appoint first to form the country’s next government. Before the election outcome he said he’ll give the first shot to the party securing the most votes, which is the PiS. However, a united opposition led by former PM Tusk secured the majority of the votes, effectively preventing PiS from ruling another term. The leaders of the three parties seeking to form a coalition urged Duda to hand over the initiative to them straight away to quicken the process. But it’s unlikely the president (a PiS member himself) will adhere to the call, even as it could prove critical in the tight timeframe to unlock €8bn in European Recovery and Resilience Facility funds that are blocked for this year.

A leading, non-partisan UK think tank, Resolution Foundation, said a future British government should consider raising the Bank of England’s inflation target from 2% to 3%. Doing so would allow for higher nominal rates, offering the central bank more room to cut rates in a downturn. Combined with willingness to cut as deep as -1%, it reduces the need for government borrowing and bond-buying in times of  crisis, research director and former BoE-economist James Smith explained. Resolution Foundation stressed that the change should only take place when the BoE returned to its current 2% goal to avoid tarnishing its credibility. And in an ideal situation it happens in coordination with other advanced economies to limit the fallout of higher inflation on sterling. But if that’s impossible, a weaker currency is a price worth paying, it concluded. UK inflation in September eased less than expected, to 6.7% and 6.1% for the headline and core gauge respectively.