Markets
Core bond yields are on track to eke out their first increase this week. A minor correction developed throughout the week, driven by haven flows on AI-related weakness in the stock market and general short-covering after a violent period for bonds. Intraday dynamics in European yields have been interesting though. While the likes of the 10-yr swap or Bund yield closed lower on a net daily basis, rates finished each trading at higher levels than their open. Combined with the technical picture it suggests the underlying trend (higher) remains a strong one. The German 10-yr and European 10-yr swap yesterday during the day lost neckline support of a head-and-shoulders pattern but rejected such a break lower into the close. We’re seeing some technical follow-up action higher today with the tenors adding around 3 bps. The front end of the curve stabilizes compared to yesterday’s close. US Treasuries underperform by adding 2-5.5 bps in bear steepening. After Fed chair Warsh steered clear from near-term monetary policy during a fireside chat with IMF’s Georgieva this morning, a status quo at the end-of-month policy meeting is virtually baked in (87% probability discounted). He sounded bullish as ever on the US economy, including on the potential supply-side effects of AI. Short-term, however, Warsh said the “massive investment surge” (sic) would have an impact through demand first. UK gilt yields lag peers (flat to +1.4 bps). BoE’s Bailey also in Bangkok this morning noted that there are signs of the neutral rate having increased. He mentioned the stronger-than-expected UK economy – the industrial update and monthly GDP print this week was (way) better than consensus – while adding that signs of second-round effects of energy-driven inflation remain subdued. A November hike is nonetheless market’s base case. They stick to a total of four increases, even as the BoE’s biggest hawk, chief economist Pill, earlier this week sounded skeptical on such pricing.
The US dollar loses some ground for a second day straight. Some short-term consolidation is possible after the drawn-out appreciation since early September. EUR/USD grinds higher to around 1.125, a rebound that in our view lacks signals of sustained strength. The trade-weighted index turns lower to the high 101 area. The technical implications for a close in EUR/GBP at current levels (0.843) could be sizeable. The pair is on track for a close below the previous YtD low, which paves the way, technically, to minor support around 0.8355/0.8374 before retracing the full upswing from Dec2024-Nov25. The UK eco calendar next week has potential to facilitate further GBP strength with the labour market report (Tuesday), September CPI (Wednesday) and PMIs (Friday) on tap. The latter are also scheduled for the euro area and are, together with the central bank’s monthly consumer inflation survey and bank lending survey, the final inputs for the October 29 ECB meeting. We don’t think it’ll alter the market pricing anymore (unchanged). Rating reviews on Friday are worth following with S&P giving its verdict for Belgium (AA-, stable outlook) and Moody’s reviewing France (Aa3, negative outlook).
News & Views
Germany and France today published a joint statement on the future of the European Automotive Industry. The objective is clear: a competitive, innovative and decarbonized European automotive industry, producing in Europe and creating the jobs of tomorrow. They reached an agreement on a joint approach which includes concessions on the emissions framework. Paris and Berlin will seek to lower overall emissions cuts for autos to 90% by 2035, without having to compensate the remaining 10%. At the start of the year, carmakers still faced obligations to go 100% electric by 2035. Other proposals include local-content requirements for companies benefiting from public support, a narrower definition of “Made in Europe” and also a step-up to a broader industrial package.
Sources told Bloomberg News that China moved to stabilize its equity market by urging companies and state funds to buy shares while guiding some investors to curb selling. Rumours stem from a meeting by financial regulators yesterday. “Authorities also issued window guidance to several major insurers, instructing them to report equity holdings, refrain from locking in losses on underwater positions, and align investment decisions with broader economic goals, according to people familiar with the matter.”
