In a calm day for markets, UK prime minister Rishi Sunak’s speech (see below) stood out. In no way it resembles anything like his predecessors Truss and Chancellor Kwarteng announced in their September 2022 mini-budget but it did trigger some minor, temporary underperformance of UK gilts shortly after. Yields in the country in the meantime add between 0.9 and 2.8 bps, in line with the 1.2-3.6 bps in Germany and 1.2-2.3 bps in the US. Both try to build on an intraday U-turn that happened during Friday’s dealings and which was supported by an unexpected pickup in housing starts and building permits. Either way, it doesn’t change market pricing about the timing for a first, full 25 bps rate cut for all three major central banks. Such market enthusiasm makes the likes of ECB Wunsch uncomfortable. In a Bloomberg interview, he said that rates should stay unchanged at the December and January meeting because of favourable developments in inflation. But to completely rule out further hikes is a too optimistic view. He added that betting on rate cuts turns policy not as restrictive as the ECB aims it to be, increasing the risk that “you have to correct in the other direction”. In the European periphery, bonds are rallying but with no particular outperformance of Italian BTPs following Moody’s decision to leave the rating at Baa3 and even lifting the outlook to stable from negative. Italian as well as Greek spreads decline by 4 bps. Portugal also sheds 4 bps. Moody’s here raised the rating two notches from Baa2 to A3.
The dollar extends a recent slide in currency markets. The trade-weighted index has tested the 50% retracement on the rally (103.46) since this summer but prevents a break for now. EUR/USD (1.0926) rose towards the 1.0945-1.096 resistance area but here too there’s not enough momentum to force something. USD/JPY dropped further south of 150 (148.54) in what is probably a bit of relief for BoJ and MinFin officials in Japan. EUR/GBP in the Asian open this morning briefly rose to a new correction high before the failed break triggered a kneejerk reaction to an intraday low of 0.874. The pair is currently holding back north of 0.876 though, extending its journey above 0.8735 support (50% recovery on the Feb-Aug decline). The Norwegian krone is performing strong (EUR/NOK 11.73) as oil prices rebound >2%, extending Friday’s short covering triggered by an article ran by the Financial Times. The British newspaper citing sources familiar with the matter reported that Saudi Arabia is planning to extend its 1mln voluntary output curb at least until the spring. Brent is trading around $82.37/b.
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German Vice-Chancellor and economy minister Habeck warned that last week’s constitutional court ruling is a major economic blow with households and companies at risk of ending up with higher power costs. The German court ruled that is was illegal to transfer untapped funds initially earmarked for the fallout of the Covid-19 pandemic in 2021. The money (€60bn) was wired to an off-budget Climate and Transformation Fund with a big part of it already allocated to specific investments. As the government’s debt brake kicked back in last year (excluding €100bn defense budget), Germany is only allowed to issue 0.35% of GDP of new net debt leaving the government with a significant budget hole to cover and opening a rift within the government coalition about installing a new debt brake suspension. Especially since the fallout of last week’s ruling could become even bigger as similar constructions have been used in the past for other off-budget funds as well.
UK PM Sunak paved the way for some fiscal giveaways when Chancellor Hunt delivers the UK government’s Autumn Statement on Wednesday. With inflation halved compared to the start of the week, Sunak said that the government can begin the next phase by turning attention to cutting taxes. Any reductions will be made carefully and sustainably within the framework that debt to GDP will fall in the fifth year of the forecast (key fiscal rule). The PM said that Tories will take five long-term decisions to build the economy: reducing debt, cutting tax and rewarding hard work by reforming welfare, building domestic sustainable energy, backing UK British business and delivering working class education.