Sunset Market Commentary

Markets

The European Commission published its Autumn Economic Forecast today. They project real GDP growth of 1.3%-1.2%-1.4% in the euro area. Economic growth exceeded the Commission’s Spring forecast (0.9%-1.4%-1.4%) in the first nine months of the year thanks to a surge in exports ahead of anticipated tariff increases and a stronger performance of investment in equipment and intangible assets (notably Ireland). Continued growth in the third quarter is testimony to the resilience of the European economy and its ability to navigate unprecedented shocks with EC data and PMI surveys for October suggesting continuing growth momentum supported by a resilient labour market, decreasing inflation and favourable financing conditions. The EC’s growth forecasts compare with a 1.2%-1%-1.3% growth path set out by the ECB in September, suggesting risks for some upside revision in December which further cement the current 2% deposit rate as a floor for coming months. The Commission expects headline inflation to hover around the ECB’s 2% target over the policy horizon, averaging 2.1%-1.9%-2% in 2025-27. That’s also above the central bank’s September path (2.1%-1.7%-1.9%). The overall EMU deficit to GDP ratio is expected to slightly increase from 3.2% of GDP this year via 3.3% next year to 3.4% in 2027. Belgium and France are amongst the worst performers. Both countries’ governments are currently deadlocked over 2026 budget talks. The EC forecasts Belgian deficits of 5.3%, 5.5% and 5.9% of GDP. Belgian parliament so far only approved capping unemployment benefits at 2 years which could result in savings of around €2bn. Belgian PM De Wever was given a final (Christmas) deadline to come up with a multi-annual budget looking for an additional €8bn in structural savings. The coalition is finding it difficult to bridge the ideological divide between left parties pushing for taxes and the right looking more to spending cuts. The Commission plots French deficits at 5.5%, 4.9 and 5.3% of GDP. The French government has a Sunday constitutional deadline to deliver a budget to the Senate to be able to adopt it by December 23. Lacking a government majority, the probability is still high that talks will collapse. French Socialists last month acted as “kingmakers” in the government’s survival after they were granted a suspension of Macron’s pension reform. Afterwards, they only asked for more. A proposal for a wealth tax (Zucman tax) was voted down at the end of October both in his original and a watered down version. Socialists leader Faure said that his party is not committed to backing the 2026 budget as it currently stands. Without a deal by the end of the week, the French government can still resort to Article 49.3, bypassing parliament, but they so far indicated that they won’t resort to that means. The situation in both Belgium and France are more examples of the precarious global trajectory of (unsustainable) public finances. Last Friday, the build-up to the UK November 26 budget triggered a significant bear steepening of the UK yield curve. Today’s market moves are technically irrelevant in FI, FX and equity space.

News & Views

Canadian inflation rose a consensus-matching 0.2% m/m in October, lowering the annual figure to 2.2% from 2.4%. A sharp drop in pump prices (-4.8% m/m) and falling grocery prices (0.6% m/m) – the largest since September 2020 – contributed to the deceleration in headline CPI. Core gauges remain sticky near the 3% upper bound of the Bank of Canada’s tolerance range. Both the median and trimmed measure remain in an elevated 2.9%-3.1% range for most of 2025 so far. Core inflation in the ‘traditional’ sense (ex. food and energy) picked up to 2.7% from 2.4%. The data underpin the central bank’s decision last month to accompany the rate cut (to 2.25%) with guidance that it is “about the right level” if the economy and inflation outlook evolve as forecasted. Canadian money markets are already positioned for a long rates status quo. USD/CAD treads water in the 1.403 area.

The Hungarian government today announced a package of tax cuts for small businesses. Orban said the HUF 90bn price tag would be covered by a tax rise on banks. The prime minister additionally announced the postponement of an excise tax hike on fuel by six months, costing HUF 20bn. Orban’s cabinet just last week raised the budget deficit target to 5% for this year and the next, providing fiscal leeway for earlier announced measures that include large-scale tax cuts for families, wage hikes and food vouchers for pensioners. but risking a market backlash at some point. The Orban administration is feeling the heat of the main opposition party Tisza going into next year’s election. The latter having a lead over Orban’s Fidesz party ever since end 2024. The forint holds steady near EUR/HUF 384.