Markets
- European bonds faced new selling pressure at the onset of trading. An interview with ECB chief economist Lane in Le Temps at least offers part of the explanation. He talks about a second wave of energy price increases, also for gas. That’s why the ECB indicated two weeks ago that the energy shock will last longer than anticipated in March. Inflation is likely to be higher for longer, before falling back towards the 2% target from mid-2027 onwards. The central bank fears upward pressure on food, energy more broadly, including electricity, and goods in general. Pressure on services should remain contained. The baseline for growth is that the EMU economy should continue to grow at a steady but modest pace provided the energy shock does not become more severe. Government spending (German infrastructure and defense package, Next Generation EU) and AI-involvement benefit the economy. Lane didn’t talk about the ECB’s reaction curve. EMU money markets attach a slight 45% probability to an October rate hike with such action more than fully discounted by December. They put the peak ECB policy rate at 3.25% by mid next year. That’s down from the 3.5% that was shortly priced in after the September rate hike. Consolidation on energy markets the past week and today triggered some more balancing positioning. A sudden drop in oil & gas prices today immediately supported core bonds (and equities) today. Brent crude fell from an intraday top around $102/b to currently $98.5/b after Kyodo News Agency cited an unnamed senior Iranian official as saying Tehran proposed reopening Hormuz in seven days if the US naval blockade is lifted first. Diplomacy seems to be gathering pace today with US president Trump potentially meeting with his Iranian counterpart this week on the sidelines of the UN General Assembly in New York. EU swap rates cede 2 to 3 bps today in a slight bull steepening move. US Treasuries underperform for a second consecutive session with yields 1 to 2 bps lower across the curve. EUR/USD is marginally weaker with first <1.1450 trades since the end of July. On the euro side of the equation, the French 10-yr OAT-swap spread serves as a drag, rising back above 100 bps. The French government is set to unveil a new support package today to address soaring fuel prices and public anger.
News & Views
- The Hungarian central bank lowered its inflation target at today’s policy meeting from 3% (+/- 1ppt) to 2.5% (+/- 1ppt). It said that “the state of nominal and real economic convergence supports lowering the inflation target”, bringing it “in line with regional practices and closer to the ECB’s target.” The central bank seized the window of opportunity to do so amid lower inflation, significantly declined household and corporate inflation expectations, a decrease in domestic risk premia and the continued stability in the Hungarian forint. The rates decision itself was the expected status quo at 5.5%. Inflation in August was 1.3%, below the projection in the MNB’s June Inflation Report. Core inflation was 2%. The central bank kept its annual forecast for 2026 unchanged at 1.8% but raised the one for 2027 to 3.1%, owing to increased energy prices and the modification of the excise duty on tobacco products. Inflation will decline to the central bank’s new target by the end of the monetary policy horizon. For that to happen in a sustainable manner, a cautious approach to monetary policy by maintaining the current policy rate level is warranted. Growth is projected at 1.8%-2.9%-2.8% in 2026-2027-2028. Risks are considered balanced to both inflation and growth. Hungarian swap yields drop 6-11 bps across the curve, be it in a move inspired by lower oil prices rather than today’s decision. The forint does strengthen and attacks EUR/HUF 360 resistance.
- The National Bank of Belgium’s consumer confidence indicator fell in September to a level last seen in May. The overall indicator fell to -10 from -7, the joint-lowest since April 2025 and below the series’ long-term average. For the second consecutive month, consumers expressed more negative views on the general economic situation in Belgium. The subindicator in September is among the weakest of the past five years. Unemployment expectations remain unchanged. Households lowered their saving intentions while viewing their financial situation over the next twelve months the same as in August.
