Sunset Market Commentary

Markets

This morning’s UK labour market report had the potential to sway markets in one direction or the other in the long run-up to next Thursday’s Bank of England policy meeting. Only … it didn’t. Employment growth in the three months through July fell by 207k, more than the -195k expected. A preliminary gauge for August (-1k) missed the bar (+30k) as well. The unemployment rate meanwhile ticked up to 4.3%, a historically low level still but nonetheless the highest since 2021. Wage growth, however, hit a record high – barring a surge driven by base effects in 2021 –  since data collection began early 2001. Average weekly earnings rose by 8.5% in the three months through July. That’s up from 8.4% in June. Excluding for bonuses, employees saw wages rise by 7.8% (unchanged vs. June). All in all a mixed report that markets did little with. A speech by the Bank of England’s deputy governor nominee Breeden couldn’t inspire either. She said the MPC would have to balance “the risk of inflation becoming embedded and more persistent” against the already delivered amount of monetary tightening, much of which that has yet to filter through to the economy. In this respect, she doesn’t expect a UK recession but GDP is probably to stay “relatively flat over the next couple of years”. Breeden’s first vote is at the November 2 meeting. Sterling in a first, brief reaction to the higher wage growth appreciated against the euro. Those gains evaporated as quickly as they came though. EUR/GBP is currently changing hands in the high 0.858 area, a tad higher than yesterday’s close. UK gilts do outperform global peers. Yields dropped straight at the open and currently lose between 3.8-7.6 bps. The 2-y yield tries to hold north of 5%. UK money markets reckon the BoE will hike once more to 5.5%, if not next week then at the November meeting. A second, final 25 bps move hangs in the air in a 50-50 split.

Tomorrow’s US CPI numbers and Thursday’s cliff-edge ECB decision is keeping investors in core areas at the edge of their seat. Both US Treasuries and German Bunds barely budge, resulting in minimal yield changes. US rates add 1.5 bps at the front while easing 0.3 bps at the 30-y. German yield changes range between -1.2 and +2.2 bps in a similar curve shift. The dollar gains against all G10 peers, recouping some or all of yesterday’s (contained) losses. EUR/USD went from an intraday high of 1.0769 to 1.071 currently. DXY in a mirror move moved higher towards but below the 105 zone. The yen already forfeits its Ueda-driven modest gains. USD/JPY bounces from 146.59 to 147.14. Brent oil rises further and is set for a close above $91/b after OPEC said that following the output cut extension from the Saudis (and Russia) there will be a supply shortfall of more than 3 million barrels a day next quarter – the biggest deficit in a decade.

News & Views

A business survey by the German Ifo institute shows that residential construction cancellations rose to their highest level since the survey started in 1991. 20.7% of companies reported cancelled projects compared to 18.9% in July. The head of surveys, Wohlrabe, says that as a result of the rapid rise in construction costs and much higher interest rates, many projects that were still profitable in early 2022 are now no longer viable. Not to mention the scaling back of subsidies because of tighter energy regulations, which is also putting a strain on builders’ calculations. 44.2% of participants reported a lack of orders, up from 40.3% in July. At the same time last year, the share was only 13.8%. Some businesses are already struggling to keep their heads above water. Currently, 11.9% of residential construction companies report financing difficulties. That’s the highest proportion for over 30 years.

At an interim meeting, the Hungarian central bank (MNB) further studied possibilities for simplifying the monetary policy toolkit. They decided that excess reserves will be remunerated at the base rate (13%) from October 1st as the gap between (emergency) overnight deposit rates and the base rate is almost closed. In other news, Hungarian finance minister Varga said that his government’s previous GDP growth forecast for this year (1.5%) is too optimistic. He believes that growth will rather end up near 0% as consumer spending gets whacked by inflation. Therefore it is of utmost important that the Hungarian disinflation process continues with single digit inflation expected from November (16.4% Y/Y in August). The forint didn’t respond to today’s news, but overall EUR/HUF remains remarkably stable despite recent underperformance from regional peers (CZK/PLN).