Sunrise Market Commentary

Markets

EUR/GBP closed below 0.84 yesterday for the first time since May of last year. From a technical point of view, 0.8376 (76% retracement on 2024-2025 EUR/GBP rally) is the final obstacle impeding a return to the 2024 low at EUR/GBP 0.8225. A strong UK labour market marked the start of yesterday’s GBP outperformance. The UK unemployment rate unexpectedly fell from 4.9% to 4.7% in the three months through August with employment rising by 102k over that same period (vs 5k expected). September monthly payrolls also printed stronger than forecast (13k vs -8k) with a 27k upward revision for the August number. Bank of England Greene yesterday evening added that a broad range of wage indicators also suggests that there is less slack in the labour market than the central bank had thought and that it may have peaked. This suggests that the risk of second round effects taking hold is higher and that explains why she calls on her MPC colleagues to proactively lean against the risk of firmer price pressures with a rate hike. The September inflation report this morning adds to the vibe. Headline CPI printed higher than feared at 0.4% M/M and 3.7% Y/Y (up from 3.4%). Core CPI accelerated to 2.8% Y/Y (from 2.6%) with services CPI even more sticky at 3.7% Y/Y (up from 3.4% vs 3.6% consensus). BoE chair Bailey speaks in a fireside chat at the Official Monetary and Financial Institutions Forum later today and is expected to validate UK money markets’ tightening bets. A November rate hike currently carries an 85% implied probability.

The single currency underperforms against nearly all other major European currencies. Rising EMU sovereign spreads are to blame. 10-yr OAT and OLO swapspreads yesterday added another 3 to 4 bps, but intraday damage was larger. 2027 budget talks are ongoing with bond markets leaving little room for complacency. In France, there’s the additional stretch with violent protests calling amongst others for relief in the cost-of-living crisis. In Belgium, PM De Wever hopes to land a multi-annual budget deal by Thursday, earlier than the official end-of-month deadline because of a looming parliamentary recess. Against USD, the euro manages to hold steady around 1.12 which is somewhat striking in the current market context (elevated/rising energy, higher spreads, tough risk climate, outperforming US economy).

News & Views

The Hungarian central bank (MNB) kept the policy rate unchanged at 5.5% yesterday. September inflation stood at 1.6%, in line with the central bank’s own forecast. Core inflation came in at 1.9% with m/m increases aligning with the 2017-2020 average. The MNB said households’ and companies’ price expectations remained at moderate levels. Higher fuel prices and regulatory changes are expected to lift inflation from 1.8% in 2026 to 3.1% in 2027 before returning to the 2.5% target by the end of the policy horizon. “The high level of energy prices, the rising yield environment, as well as the uncertainty surrounding the global economic and financial market outlook warrant a careful approach to monetary policy”, it said. The outro paragraph features the usual reference to ensuring positive real interest rates and FX stability as important factors to achieve price stability and the central bank’s preference to move cautiously and in a data-driven manner. But the MNB also introduced new elements that “have an effect on the room for maneuver”, namely economic policy measures and their market reception. The Hungarian forint ended the day slightly lower yesterday to EUR/HUF 364.

A batch of US housing data yesterday came in to the weak side of expectations, showing at least partially the impact of sharply higher mortgage rates (daily national 30-yr average hovering around 7.5%). September housing starts fell to 1221k, or -5.2% m/m, which was the second-lowest (after May 2026) since the early Covid period in March-May 2020. The leading indicator, building permits, fell 0.2% m/m. While that decline was less than feared, the total amount (1400k) hovered near the post-pandemic lows. Pending home sales, which tracks signed real estate contracts of transactions that have yet to be closed (typically one or two months later), tumbled 7.3% m/m, pushing the yearly reading to a three-year low of -12.6%. The weak data come on the heels of the NAHB housing market index dropping more than expected on Monday. The reading of 29 was the lowest since 2012. A reading above 50 indicates that more builders view conditions as good than poor.