Markets
- Summer recess is officially over. Budget season has arrived instead. The French finance minister Lescure used a radio interview today to remind the public and political parties of the dire fiscal situation the country faces. Doing nothing would swell the budget deficit to 6% in 2027. The government is seeking to keep it below 5% but that will require “efforts in every dimension – spending and revenue”, Lescure said. The French budget is due by the end of the month. Premier Lecornu’s minority government needs the opposition to push anything through. But presidential elections in April 2027 are likely to dent the appetite for compromises. The idea of bypassing parliament (Article 49.3) resurfaced last week but is all but certain to trigger votes of no confidence, as it has done so in the past. The French 10-yr spread has risen over the course of summer and is mere basis points away from the highs seen in the final week’s of the eventually ousted Barnier administration.
- Chancellor John Healey in the UK in his first major speech vowed fiscal discipline in the first budget since the new prime minister and his cabinet rose to power earlier this year. Healey said he would build on his predecessor’s efforts to reestablish UK credibility in bond markets. He reaffirmed his and the PM’s commitment in meeting the fiscal rules and seeks to include a “buffer to protect against uncertainty, to controlling borrowing to bear down on inflation, and to reducing long-term pressures on our public finances.” That fiscal buffer was nearly cut by half thanks to the recent surge in global interest rates, including in the UK. Yields rise 2.1-2.4 bps in muted trading today, a move tied to the uptick in energy prices. Brent oil is on track for the highest closing level since mid-July, around $97.5/b. Dutch natural gas prices soared to a multiyear high to €75.2/MWh in the open this morning before paring gains somewhat to €73.4 currently. Another round of US and Iranian tit-for-tat strikes are the reason. It’s also lifting the likes of German yields, which add 2.9-3.4 bps across the curve. The AfD’s best-ever state election in Saxony-Anhalt may have raised the country’s political risk premium. While energy prices are on the rise, an additional inflation source is intensifying. The Panama Canal’s administrator said daily shipping transits may have to be cut back again from an already-reduced 32 to 27 due to water shortages. Except for rising transportation costs, the Canal is also an important part of the global commodity (such as LPG) logistics chain.
- The Japanese yen stands out in FX markets. USD/JPY loses the 155 support area and is now trading at its lowest since end-February. Drivers for the move appear technical and perhaps compounded due to thinner liquidity circumstances since US financial markets are closed for Labour Day. EUR/JPY is testing the 180 big figure. Other pairs trade little changed: EUR/USD hovers sideways just north of 1.16, EUR/GBP is stuck near the 0.86 resistance.
News & Views
- Swedish headline inflation printed at -0.3% M/M and 0.3% Y/Y (from 0.2%). CPIF inflation at -0.3% M/M and 0.7% Y/Y matched July. CPIF ex. energy (-0.6% M/M and 0.5% Y/Y) eased slightly from 0.5% Y/Y in July. Low inflation figures in Sweden currently are mainly due to fiscal measures from the government (halving VAT on food, fuel tax cut, lowered prices for public transportation and measures to ease household energy costs). Today’s data were softer than market expectations but at the same time the Riksbank assessed that similar July levels still were seen as slightly above the RB June forecast. The RB concluded that the probability of a rate hike later this year remains in place. Still, the 2-y SEK swap rate eases 4 bps (2-y 2.7%) after the release. Markets discount a first full 25 bps hike by early next year. The krona eases from EUR/SEK 11.10 to 11.15.
- The KPMG and REC September UK Jobs report (compiled by S&P Global) signaled the first broad-based improvement in hiring trends for nearly four years. Permanent placements rose slightly for the first time since 2022 (index 50.5) while temporary billings expanded for the fifth month in a row. Pay trends stayed strong in August, as recruiters reported a quicker rise in starting salaries and another solid increase in temp wages. On the other hand, a further fall in overall vacancies and redundancies contributed to another marked rise in total candidate supply, which grew at the fastest pace for three months.
