Sunset Market Commentary

Markets

• The final quarter of the year kicked off spectacularly. Core bonds sold off again in yet another sign of how strong the underlying trend is, particularly at the long end of the curve. In the UK, the 30-yr tenor surged past the psychologically important 6% barrier. The same maturity (and the 10-yr) in the US pierced towards a new 24-year high intraday of 5.68% (and 5.34%). European yields similarly rose to new 15-year highs. One can argue about the drivers, but the fact is that they are many and all work for yields to move in the same direction. In a nutshell: resilient (EMU, UK) or outright strong (US) economies, above-target inflation and upside inflation risks posed by high energy/commodity prices, (expected) monetary tightening in an era of higher neutral rates, AI-companies competing for capital, boosted defense spending and, related to that, persistently high budget deficits all the while price-insensitive central banks are no longer mopping up a floor littered with govvies. We’ve seen the footprint of the public finance narrative once again in France, where the OAT/swap spread at some point today rose well above 120 bps – the highest ever since the creation of the monetary union. The French government today unveiled the details of a €54bn fiscal effort from 5.4% this year to … 5% the next. Getting it through parliament with a minority government will prove difficult while the presidential elections in May 2027 only add to the complexity.
• A Reuters report in early European dealings prevented things from turning really ugly. The news agency said that the US had contacted Germany and France to make them draw down emergency diesel inventories by around 1/3rd over six months or face an export ban. That pressed European diesel prices lower in an instant, blunting the sharpest edges of the rate surge. While that prompted bonds to recover some ground, it is addressing only one of the arguments mentioned above and not even in a sustainable manner. We’re not surprised to see yields having left the intraday lows in the meantime. They trade 2-4.5 bps higher in the UK and are about 4 bps (2-yr) down in Germany. US interest rates are 3 bps lower (2-yr) to 5 bps higher (30-yr).
• The euro appears to have caught a French fever. The core bond intraday reversal helped EUR/USD to bounce off the day’s lows but it’s looking unconvincing. The pair is currently trading at 1.1286, about the weakest in more than a year. DXY briefly pierced through the summer highs to trade at its highest since May 2025. Sterling’s strong momentum continues. EUR/GBP attacks the August lows, the final hurdle ahead of the YtD low at 0.8445.

News & Views

• September Swiss inflation printed bang in line with consensus today. Prices stabilized compared to August, but the annual pace accelerated from 0.8% Y/Y to 1% Y/Y. That’s the highest level since August 2024. On a monthly basis, higher prices for heating oil, petrol and diesel increased balanced out against lower prices for international package holidays, car rentals and car sharing and hotels and parahotel accommodation. Swiss core inflation (excluding fresh and seasonal products, energy and fuel) remains in the lower end of the SNB’s 0-2% inflation target at 0% M/M and 0.5% Y/Y. Domestic goods prices were 0.2% lower on the month to be 0.7% higher compared with September 2025. Prices for imported products increased by 0.5% M/M and 2.1% Y/Y. Higher oil prices and a weaker CHF play a major role. Today’s figures don’t alter the case for stable SNB policy rates (at 0%). The Swiss franc trades somewhat stronger against the euro today with rising EMU sovereign spreads for the first time impacting the pair. From a technical point of view, EUR/CHF was bumping into YtD highs just below 0.95.
• The Czech manufacturing PMI slowed to a slightly softer growth rate in September with the headline number slowing from 54.1 to 53.5. Continued positive demand conditions among both domestic and international customers prompted companies to increase their work forces at the fastest clip since April 2022. Inventories were depleted with stocks of purchases falling for the first time since February. Backlogs of work accumulated. Input buying increased despite a greater deterioration in vendor performance. Businesses remained positive on the outlook for the coming year. On the price front, (input) cost pressures intensified while output charges rose at a slower pace.