Markets
Sentiment stayed the main driver of action on most markets. That proved to be alright for most of the day thanks to solid earnings and outright strong US (secondary) data. Risk appetite later faded somewhat but didn’t prevent the EuroStoxx600, the S&P500 or the DJI to close at a record high. EUR/USD followed overall market mood by rising initially but paring gains eventually to close sub 1.16. DXY bounced off support at 93.73, tested the 94 area but closed just below. USD/JPY again captured 114 with the yen being the underperformer across FX markets. Sterling was supported by strong CBI data and UK MinFin Sunak seen allowed to focus more spending when he’ll present the budget today. Support formed recently at around EUR/GBP 0.842 was under heavy attack but survived. Another element playing in favour of sterling were diverging yield dynamics. While inflation expectations rose further in the US and EU, they declined about 8 bps in the UK. As nominal UK yields eventually dropped 3 bps in the 10y tenor, this means real yields rose about 5 bps. In contrast, real yields (10y) in the US fell while even reaching a new record low in Germany (-2.19%). Other changes across the yield curve amounted to +0.6 bps (2y) to -4.1 bps (30y) in the US and +0.6 bps (2y) and -2.5 bps (30y) in Germany.
Chinese stocks underperform in Asian trading today. Tensions between the US and China rofstrong CBI data and UK MinFin Sunak seen allowed to focus more spendingse again after the former banned a Chinese telecom company from operating on US soil amid security concerns. The report highlights the strained relations even as USTS Yellen and Chinese VP Liu He had a constructive call just a day earlier. The yuan is resilient at USD/CNY 6.38, thanks to an overall weakish USD too. EUR/USD ekes out a small gain to just north of 1.16. The Aussie dollar rises slightly on consensus-beating core CPI (see below) which also launches short-term bond rates up to 15 bps higher. Core bonds inch lower with the front end underperforming.
The UK budget presentation is one of today’s highlights. It’s going to be a balancing act between a not-too-expansionary plan that fuels inflation even further while refraining from choking off the recovery by being too conservative. EUR/GBP in any case is still in the danger zone from a technical perspective. US data is of secondary importance for EUR/USD ahead of the ECB tomorrow. Lagarde might face some tricky questions including on the recent hawkish repositioning in EMU money markets. It’s unlikely investors will anticipate on such a potential market-moving policy meeting thus sticking to a wait-and-see approach. EUR/USD 1.153 is the first technical reference to the downside. In a similar vein, we assume no outspoken directional trading in core bonds either.
News headlines
CNB deputy governor Nidetzky said that central bankers will trade off a 50 bps rate hike against a second consecutive 75 bps move at next week’s policy meeting (Nov 4). New inflation forecasts might even point to a bolder move because of the mix of high inflation, a tight labour market, a weaker-than-expected CZK and a loose fiscal policy stance. Nidetzky says that it will be a huge success if the CNB manages to get inflation (headline and core currently 4.9% Y/Y and 5.8% Y/Y) into the 1% target band around the 2%-inflation target. In order for that to happen, he aims at reaching a neutral policy rate level 2.5%-3% by the end of the year (Dec 22) or early next year (Feb). Czech money markets currently discount a policy rate peak >3.5% in 2022. The policy rate currently stands at 1.5%. CZK remains relatively weak around 25.70 despite hawkish CNB talk and market expectations.
Headline Australian CPI rose by 0.8% Q/Q in Q3 though the annual pace fell from 3.8% Y/Y to 3% Y/Y. Importantly, a 0.7% Q/Q acceleration in core CPI brings the yearly reading to 2.1% Y/Y (from 1.6% Y/Y), the highest level since Q4 2015 and back within the RBA’s 2%-3% inflation target band. The outcome prompted a significant bear flattening of Australian yield curves. The yield on the Apr2024 Australian government bond promptly surged to 0.2%. The RBA tries to exert yield curve control by keeping rates up until that specific bond near the 0.1% policy rate. Markets already factor in RBA rate hikes next year even if the RBA pledges unchanged policy over the policy horizon (2024). The Aussie dollar slightly profits this morning with AUD/USD testing 0.7532 resistance (H1 2021 range bottom).
