HomeContributorsFundamental AnalysisEU Push for Tighter Fiscal Policies in 2024

EU Push for Tighter Fiscal Policies in 2024

Market movers today

US durable goods orders for October will provide more clues to US investment spending. Due to Thanksgiving tomorrow, weekly initial jobless claims are also released today, a day earlier than usual.

In the euro zone consumer confidence for November is due out in the afternoon.

The Netherlands holds general elections to choose a new parliament. Recent polls suggest that the election will be very close with none of the big parties polling over 20 percent leading to a fragmented parliament. Hence, a new coalition is therefore prone to consist of at least three and maybe even more parties with prolonged coalition talks. Thus, significant policy changes are unlikely, and the election will probably result in another moderate government with focus on immigration, housing, climate issues, and a constructive engagement with the EU. We receive the first exit polls from Ipsos at 21:00 CET and expect a prediction from the largest news agency around midnight.

Today, UK chancellor Jeremy Hunt will present the Autumn Statement. There has been speculation of whether tax cuts will be announced amongst other changes to income taxes, inheritance tax and/or national insurance. The measures presented will try to help the Conservative party following poor performance in the polls with election year coming up. According to the latest Politico poll of voting intention from 17 November the Conservatives stand at 27% while the Labour party has pulled ahead at 45%. However, with the “mini”-budget scandal still fresh in mind, the chancellor will be wary to incorporate anything which will not ensure and signal debt sustainability over the forecast horizon. Overall, we do not expect this to be a market mover event and by extension for GBP.

The 60 second overview

Fed: Minutes from the FOMC’s November meeting provided markets with little new information last night. With regards to financial conditions, participants noted that moves in Treasury yields ‘could be volatile’, and that any tightening in financial conditions would have to be persistent to have an impact on monetary policy. While most of the recent Fed commentators have called for patience with rate changes, some participants flagged that it was ‘critical’ that monetary policy remained sufficiently restrictive. In terms of risk outlook, ‘most participants continue to see upside risks to inflation’. As such, the Fed’s focus remains on incoming data with the next key release being the Flash PMIs on Friday. So far, early November data has been mixed; yesterday Philly Fed non-manufacturing business activity index rose modestly from October, contrasting weaker signals from jobless claims and consumer sentiment released earlier. Overall, we still think the Fed is likely done with rate hikes for now.

Fiscal policy: The EU Commission has presented its opinion on the 2024 draft budgets for the euro area member states in its European Semester Autumn Package. The main conclusion is that The Draft Budgetary Plans of Belgium, Finland, France, and Croatia risk not being in line with the Council Recommendations. German budget plans are not fully in line with the recommendations and Germany should wind down energy support measures as soon as possible. The fiscal rules of the EU have not functioned well, and no country had ever received a fine for breaching the rules. Hence, the impact on the opinion from the Commission might not mean much. Yet, with new fiscal rules being currently negotiated the possibility of stronger enforcement next year increased the risk that countries such as France and Belgium have to adjust to more austere fiscal policy in 2024.

Rate cut: The Hungarian central bank cut its base rate by 75bps to 11.5% yesterday. Hungary has the highest inflation rate in the EU but inflation has declined from 25% in Q1 to 9.9% in October.

Equities: Global equities were lower yesterday after a long winning streak. The drop was in no way dramatic and it is hard to pinpoint one single factor or data point leading to the slight drop in risk appetite. Defensives outperformed cyclicals and small caps sold off. However, if we take a look at the VIX index, it came slightly lower again yesterday despite equities losing a bit of steam. It has been remarkable to see how quick VIX has been coming down from 22 to 13. No doubt it has led to substantial buying from CTA funds, and they have played a big role in the strong run of equites during the last month. The tailwind to equities from CTA funds and in general positioning will be a lot lower going forward. US equities yesterday: Dow -0.2%, S&P 500 -0.2%, Nasdaq -0.6% and Russell 2000 -1.3%. Small gains in Asia this morning while futures in Europe and US are roughly unchanged.

FI: The bund curve bull flattened a couple of basis points from the long end of the curve in a relatively calm session yesterday. The German ASW spreads widened a bit following the significant tightening seen recently. The market reaction following the FOMC minutes was muted as policy signals were generally in line with what has recently been communicated by members. 10Y UST yields ended the day close to unchanged, while the short end of the curve was down 2-3bp.

FX: EUR/USD declined modestly during yesterday’s session with the release of FOMC’s November meeting minutes last night offering little news. NOK FX has been this week’s winner in a move fully attributable to the external investment environment and not least the rise in EM- and commodity FX vs the USD. GBP was one of yesterday’s winners following hawkish remarks from BoE Governor Bailey but we expect today’s Autumn Statement to offer muted market reactions. In line with our expectation, EUR/DKK has dropped back below the central rate again to a level around 7.4550.

Credit: Credit spreads were slightly wider yesterday as iTraxx Main closed at 69bp (+1bp) and Xover at 383bp (+2bp). Primary market activity remained vibrant with many deals priced across the corporate and financial segments. Within the latter, Caixabank drew solid demand for its 10y EUR1bn senior preferred deal, while in covered bonds Wuestenrot Bausparkasse struggled to generate sufficient demand for its 5y EUR500m green bond, thus becoming the latest example to show that the market remains challenging particularly for smaller issuers.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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