Markets
Aaaand they’re back at the center of attention again. UK gilts underperform compared to Bunds and Treasuries, especially – you guessed it – at the long end of the curve. The 10-30 year bucket adds 5 bps. A string of sub-par UK gilt auctions this week has been the trigger. While Debt Management Office had no problem in raising the amounts targeted, some of the demand measures were the weakest in a couple of years. That was the case for the 5-yr and 30-yr auctions earlier this week as well as for today’s 9-yr and 13-yr sale. It is seen as investors beginning to worry for a growing gaping hole in public finances that needs to be plugged at the annual Autumn Budget end-November. Measures such as the Bank of England skewing bond sales (QT) or the DMO skewing auctions to the short end of the curve are just a window-dressing attempt and do nothing about the underlying problem of consistent overspending. Keep doing that and we fear a fiscal reckoning from markets. EUR/GBP tried to capitalize on sterling weakness and attacked the 2025 highs in the mid 0.87-0.88 area for a third time in as many months. GBP/USD slipped below 1.34 and is on track for the lowest closing level since early August. The risk off mood isn’t particularly helpful for GBP either. Stocks lose around 1%, pressured by a sudden flip in US yields higher. Here it’s the front end that underperforms (+6 bps at some point before cutting that to 4.5 bps currently) following a surprise drop in jobless claims (218k) to the lowest level since July. We understand markets’ growing sensitivity vs the labour market, but this kind of mood swings to what is known as a notoriously volatile series doesn’t cease to amaze us. Other US eco data included an upward revision to (now really outdated) Q2 GDP growth (3.8% annualized from 3.3%) thanks to higher personal consumption (2.5% from 1.6%) as well as to the Q2 PCE price indicators. Durable goods orders came in on the stronger side of expectations except for the gauge used as an investment proxy in GDP calculations (shipments non-defense ex. aircrafts, -0.3% vs +0.3% expected). The dollar translates widening yield differentials (German rates add around 1-3 bps) into gains against the common currency. EUR/USD dips below the 1.17 big figure, confirming yesterday’s break below the short-term upward sloping trendline doing so. DXY rallies beyond the 98 barrier to the strongest level in three weeks. USD/JPY is pushing towards the upper bound of the summer’s sideways trading range (excluding the end-July failed outbreak attempt) in the 149+ area.
News & Views
The Swiss national Bank left its policy rate as broadly expected unchanged at 0%. The updated inflation outlook, conditional on a 0% policy rate over the full horizon, is unchanged compared with June: an average of respectively 0.2%-0.5%-0.5% in 2025-2027, implying inflation remaining stuck in the lower half of the 0%-2% inflation target. Swiss economic growth was weak in the second quarter after an increasingly strong Q1 (frontrunning tariffs). The economic outlook has deteriorated significantly due to higher US tariffs (39%) with the SNB expecting growth of 1-1.5% for this year as a whole and of just under 1% for 2026. The SNB remains willing to the active in the FX market as necessary, but there’s no specific reference to CHF strength. In four weeks, the SNB for the first time releases Minutes of its deliberations. They can give more insight on views on FX, if any, and whether they could trigger the high hurdle of returning to negative interest rates or not. SNB President Schlegel today stressed high risks tied to NIRP. EUR/CHF was unmoved today, trading near 0.9340.
The ECB posted an article on its blog called “when groceries bite: the role of food prices for inflation in the euro area”. The authors find that EMU headline inflation has fallen back to the 2% inflation target, but that food prices remain stubbornly high. In August, food inflation was the highest among HICP categories at 3.2% Y/Y with prices about 33% above pre-pandemic levels. Key drivers are energy and fertiliser costs (post-Ukraine war), labour cost increases and climate-related disruptions. Some of them are long term structural trends which can result in persistent inflationary pressure. Distinguishing between cyclical and structural drivers was part of this year’s strategic assessment by the ECB. Food prices matter even more to the central bank as they are very visible and important to households, influencing their overall inflation expectations. Poorer households also face higher effective inflation which could lead to second-round wage effects.
