Sunset Market Commentary

Markets

Rating agency Moody’s publishes its verdict tonight on Belgium’s Aa3 rating review. Almost exactly one year ago, they changed the outlook on that rating from stable to negative. The decision reflected the risk that the (then) next government would be unable to implement measures to stabilize the government debt burden. In the absence of a large fiscal consolidation programme, debt will continue to rise due to the material structural increase in expenditures in recent years and persistent spending pressure. Moody’s flagged structural headwinds to fiscal consolidation and the lack of intergovernmental coordination mechanisms to achieve an effort at all levels of governments as other vulnerabilities. Looking back, the Belgian federal government aimed at a 5.4% of GDP deficit by the end of this year. Latest estimates by the Planning Bureau suggest that 5.8% of GDP is the more likely outcome, coming close to the Monitoring Committee’s worst-case scenario of 5.9%. Negotiations for the 2026 budget are currently ongoing, but we’re looking at efforts to stabilize the deficit ratio at best. PM De Wever has stated that at least €10bn in cuts would be the minimum required to meet EU expectations (4.5% of GDP deficit next year), but even within the ruling coalition this is labelled excessive. The Planning Bureau even estimates the deficit to rise again to as much as 6.5% of GDP next year due to persistent structural imbalances and spending pressures. Belgium is currently under the Excessive Deficit Procedure with the EC recommending to limit net expenditure growth to 2.5% next year in order to keep the deficit reduction path toward 3% of GDP by 2029 alive. Long story cut short, there’s a reasonable risk that the downgrade criteria from Moody’s have been met, especially with the debt ratio remaining on a rising trend towards 110% of GDP next year. Back in June, rating agency Fitch was the first to strip Belgium off its AA rating. They stressed the structural weakening of Belgium’s fiscal position over the last few years. They did the same to France in September over exactly the same reasons. Rating agency S&P gives an update on Belgium’s AA rating (negative outlook) on October 24. Both Belgium and especially France are gradually evolving to “sick men in Europe”. A quick look at swapspreads shows France (83 bps) now trading above Italy (81 bps) and Belgium (57 bps) above Spain (55 bps). We continue to see risks for more relative underperformance from Belgium and again especially France. We stick to our view that markets underestimate the risks of snap legislative elections even after Macron announces a new technocrat PM tonight. The more this becomes a market theme, the more it can weigh on the single currency in the short term. EUR/USD holds below the 1.16 handle for now with next technical support at 1.1392.

News & Views

Norwegian headline inflation quickened from -0.6% to 0.4% in September, lifting the annual print from 3.5% to 3.6%. Clothing & footwear (4% m/m), education (2.5%),communications (1.1%) and housing (0.7%) showed some of the largest price increases. Core CPI rose by 0.2% m/m. The yearly 3% that marked the first deceleration (from August’s 3.1%) in four months came as a slight downside surprise, both for consensus (3.1%) and the Norges Bank (3.2%). The central bank last month cut the policy rate to 4% but still-elevated inflation meant it saw virtually no more room for further normalization. The updated forecast indicated one move annually over the next three years. Markets slightly add to the easing bets but nevertheless expect nothing to happen at least through 2026Q1. The Norwegian krone underperforms global peers. EUR/NOK rises to 11.68.

Canadian employment growth blew away expectations, adding 60.4k jobs in September. Analysts braced for a meagre 5k after the combined 105k contraction in July & August. Full-timers more than offset a 45.6k decline in part-time jobs. The unemployment rate stabilized at a four-year high of 7.1% while the participation rate marginally recovered to 65.2% to remain amongst the lowest readings in both the pre- and post-Covid era. The better-than-expected outcome should alleviate some of the concerns at the Bank of Canada. Ottawa lowered rates to 2.5% in September. Aside from diminished upside inflation risks it referred to the two previous disappointing reports as a sign of a weakening labour market which would weigh on household spending in the months ahead. Canadian money markets assumed the BoC to cut rates more or less one more time this year but start doubting now. The market implied probability dropped from 90% to 65%. The Canadian dollar strengthens with USD/CAD dropping back below 1.40 after closing above that level yesterday for the first time since mid-April.