Markets
Investors on both sides of the Atlantic are facing a deep eco radio silence these days. The Minutes of the September Fed meeting yesterday indicated that a large majority of governors subscribed chair Powell assessement that downside risks to the labour market warranted a scaling back monetary restriction. However, the document showed little guidance on the timing/pace of additional steps on which governors had highly divergent views. With the policy rate still above neutral, markets for now have little reason to change their positioning, pricing about two additional steps 25 bps cuts end October and in December. NY Fed President Williams puts himself on the dovish side, indicating he will support lower rates this year of the economic evolves as expected (including inflation moving up to around 3% and the unemployment rate inching up beyond its current level of 4.3%). Even so, markets understand that even his (influential) position is only one ‘dot’ in a highly dispersed map. US yields today are ‘raising’ between about 1.5-2.5 bps across the curve. The focus now turns to this evening’s $22 bln 30-y Treasury action. Yesterday’s 10-y sale only met mediocre buying interest. How much will the fiscal stability topic still affects the 30-y sale? EMU/German yields also are holding very tight ranges (0.5 -2 bp higher). The Minutes of the September ECB policy meeting as expected indicated little reason for the bank to react to short-term deviations (cf infra). Even France today isn’t able to provide some directional bias. Outgoing Prime Minister Lecornu yesterday informed President Macron that a basis of lawmakers is prepared to provide a ‘platform of stability’ to help fabricating a 2026 budget. Even so, it currently is far from clear who will be prepared/able to finalized this Herculean task. (French) bonds at least don’t aggressively front run on a positive outcome yet. The 10-y spread of French bonds over swap still trades near 84 bps, compared to peak levels of near 88/90 earlier this week. European equity markets show no clear trend (Eurostoxx unchanged, CAC40 +0.4%). US indices open mixed/little changed.
In FX markets, the dollar remains the ‘by-default’ outperformer, but also here the ‘conviction’ of the move is fading a bit. DXY surpassed 99, but struggles to hold on. Over the previous days, the dollar mainly profited from (political) uncertainty haunting the euro and the yen. EUR/USD, despite current calm on/in France, is still fighting an uphill battle (currently 1.161). A break below 1.1574 brings the 1.1392 August low on the radar. With respect the yen, we have to impression that the decline at least might slow. The pair still touched an new ST peak north of 153. However, the question gradually looms how far the yen can weaken before the BOJ will be ‘forced‘ to still raise its policy rate, whatever the ‘guidance’ from a new government.
News & Views
Portugal’s 2026 budget bill has stronger growth penciled in as well as a small surplus for the fourth consecutive year. The center-right minority government expects the economy to grow at a 2.3% clip next year, compared to an anticipated 2% in 2025. The projected budget surplus of 0.1% comes even as Portugal plans tax cuts for companies and families, allowing the public debt ratio fall further from a peak of more than 134% in 2020 to 90.2% this year and 87.8% in 2026. The bill marks once more the stark and growing contrast between the southern European periphery (remember PIGS) that used to underperform the semi-core. The likes of France and Belgium are currently facing a daunting budget task with the former not even having a stable government in place to take up the gauntlet.
“The current level of interest rates should be seen as sufficiently robust in managing shocks, in view of two-sided inflation risks and taking into account a broad range of possible scenarios.” The conclusion in the ECB’s meeting minutes was a pretty straightforward one. “Several” thought inflation was at risk of undershooting the bank’s 2% target and a “few” feared for the opposite to happen. But with ECB’s Lagarde in recent comments noting that the range of risk around the inflation was narrowing, there is little reason to expect much changes to the policy rate short-term. The ECB acknowledged, however, that the current situation was likely to change materially at some point, but it it’s difficult to know when and in which direction. That makes waiting for more information the best option for the time being. ECB policymakers agreed that their June forecast was largely materializing, resulting in a rates status quo at 2% and more or less unchanged September projections.
