Sunset Market Commentary

Markets

After the Fed decision yesterday it was up to the Bank of England (BoE) to assess whether the balance between inflation and growth/health of the labour market allows to continue policy easing. Contrary to the Fed, this wasn’t the case. The focus in this balancing exercise during summer turned again to overweight inflation risks. BoE currently assess that it still has some squeezing out to do on existing or even emerging persistent inflationary pressures, to sustainably return inflation to the 2% target. With this in mind, the BoE today decided (7-2 majority) to keep the policy rate unchanged at 4%. The committee still expects inflation to sightly rise in September from the 3.8% Y/Y August level, before returning to 2% thereafter. Still, the committee remains alert on the risk that the temporary uptick in inflation could put additional pressure on wages and price setting. Risks to inflation remain tilted to the upside. This only allows for a gradual and careful approach with respect to further withdrawal of policy restraint. In this respect, the BoE is not on a preset course. Aside from decision on the policy rate, the BoE also decided to slow its stock of bond purchases to £70 bln over the next 12 months (was £100 bln this year). In executing this process the bank will sell fewer long maturity gilts than Gilts at other maturities (40% ST, 40% MT and 20% LT). The BoE decision both on the policy rate and on QT were broadly as expected. Gilt yields today are rising between 0.5 bp (2-y) and +6.5bps (30-y), a move in line with Euro/German bond markets. Markets still see only about a 35 % chance of a BoE rate cut before the end of the year, with a next 25 bps stop not fully discounted before April next year. EUR/GBP is stuck in a tight range in the upper half of the 0.86 big figure (0.868).

Global markets, including US Treasuries, had to navigate yesterday’s Fed communication, which basically showed a high degree of fog/dispersion of views as the FOMC resumed reducing policy restriction yesterday in precautionary move to balance the risk of a further weakening in the labour market. In this respect, US jobless claims today provided a first (admittedly very mince, fragmented) reality check on markets’ sensitively to labour market data. Weekly claims declining from 264k to 231k (vs 240k expected) was enough for (short-term) yields to reverse an early decline of about 3 bps. US yields currently add 3-5 bps across the curve. The German yield curve bear steepens with the 2-y yield little changed while the 30-y adds 7 bps. Similarly, the dollar reversed a tentative intraday loss. DXY currently trades 97.45 (from 96.92). EUR/USD aborted an attempt to regain/hold north of 1.18 (currently 1.176). Despite an indecisive picture on Fed policy/global monetary conditions post yesterday’s FOMC decision, equities again were better bid with the EuroStoxx 50 adding 1.25% and the S&P 500 opening at a new record (+0.4%).

News & Views

The Norwegian central bank lowered its policy rate by 25 bps to 4% this morning. The moves caught some by surprise after (core) CPI, amongst others, last week came in to the upside of expectations. The Norges Bank indeed noted that inflation may remain elevated for a little longer than projected in June with only little spare capacity in the economy. The central bank had considered to keep the rate unchanged but eventually opted for a rate cut, stressing that the job of bringing inflation back to target has not been completed, but a cautious easing of monetary policy will pave the way for returning inflation to target without restraining the economy more than needed. “Cautious” in the Norwegian case means one more rate cut per year in the coming three years, according to the new forecast. The policy rate should be around 3-3.25% at the end of the policy horizon in 2028. The Norwegian krone whipsawed in the wake of the decision but EUR/NOK eventually trades virtually unchanged around the 11.59 opening levels.

Growth in New Zealand missed the -0.3% q/q expectation by a huge margin. The -0.9% contraction in Q2 fully wiped out the advance made in Q1. The economy is now 0.6% smaller than the same period in 2024. Growth in services stalled while the goods (-2.3%) and primary (-0.7%) industry sectors declined. The soft print spurred bets for a bumper rate cut by the New Zealand central bank (RBNZ). Markets attach a 33% chance for a 50 bps move in October. That would mean the RBNZ hit its end of year policy rate target (2.5%) made in August one meeting ahead. NZ swap yields tanked 12 bps at the front. The kiwi dollar fell to NZD/USD 0.59.