Markets
A slew of central bank meetings kept markets busy all day. From the Turkish central bank (+500 bps to 30%) over the Riksbank & the Norges Bank (+25 bps to 4% and 4.25%) to the Swiss national bank and the Bank of England (status quo). A summary for most of them can be found below while we discuss the BoE here. The central bank’s decision to leave rates unchanged at 5.25% was a close 5-4 call. Inflation, though still too high, dropped more than expected with the central bank specifically pointing to services inflation finally easing. The labour market, meanwhile is showing early signs of easing (eg. lower employment rates and higher unemployment rates) and economic growth is expected to be lower following disappointing PMI’s and several other business indicators. Market pricing going into the meeting (about 50-50) suggests there was an equally solid case to be made for another hike. But the ECB’s and Fed’s pause probably (though not officially) helped to tilt the balance in favour of a hold. The BoE retains the possibility of further hikes should inflation prove more persistence but we think the bar is high. Governor Bailey’s appearance before parliament two weeks ago once again made that clear. The pound slips. EUR/GBP is testing 0.8678 resistance. Cable (GBP/USD) loses 1.2308 support (May low) to trade at 1.2262, the lowest since mid-March. UK yields in a kneejerk reaction dropped before quickly paring losses again. Current changes vary between 7.5-12.4 bps with the belly underperforming.
Core bonds are spared no respite after yesterday’s hawkish Fed meeting. And if it weren’t enough, once again bumper US jobless claims (201k vs 225k) just came in today. US yields extend gains with changes varying from -1.7 bps (2-y, after briefly hitting new cycle high) to +8 bps (30-y). German yields rally 4-5.9 bps. The 10-y yield is testing the previous cycle high at 2.77% in a move largely driven by real yields. The one in the US meanwhile moves further north of the 2% barrier to the highest since 2008. The dollar gets another push in the back, including from a dire risk environment (stocks down 1.4% in Europe, 1% on WS). EUR/USD temporarily lost 1.0635 support and went for 1.0611 before paring losses. DXY gapped above 105.38 resistance at the open trade at 105.57 currently. USD/JPY is the exception to the rule (147.9) with the yen banking on its safe haven status going into tomorrow’s BoJ meeting.
News & Views
The Swiss National Bank (SNB) unexpectedly left its policy rate at 1.75%. A wide majority of analysts expected an increase to 2%. Governor Jordan said that the battle on inflation isn’t over yet, but the SNB is able to wait for the December review to see whether previous tightening was sufficient to keep inflation within 0-2% on a sustainable basis. Further tightening remains possible. Inflation in Switzerland in August eased to 1.6% Y/Y. The SNB expects 2.0% at the end of this year and an average of 2.2% next year before returning to 1.9% in 2025. The lower inflation trajectory compared to June is due to lower economic growth and slightly lower inflationary pressure from abroad. For the second half of this year, SNB expects annual growth of about 1.0% for 2023. The SNB remains prepared to sell foreign currency if needed. However, given recent CHF-strength, that’s probably not the case right now. EUR/CHF initially rallied from 0.957 to 0.9675, but the franc gradually recouped part of the loss (currently 0.963).
The Norges Bank and the Swedish Riksbank raised policy rates by 25 bps to respectively 4.25% and 4.0%. Swedish inflation is falling, for an important part due to lower energy prices. Still CPIF inflation at 4.7% is still too high and well above the 2% target. Core inflation excluding energy even stands at 7.2%. The RB sees CPIF and core inflation in 2024 respectively at 2.5% and 2.9% and at 1.8% and 2.1% in 2025. Growth for this year was downward revised to -0.8% (from -0.5%) and to -0.1% in 2024. The (“unjustifiable”) weak krone adds to inflationary risks. The policy rate can therefore still be raised further. The krone briefly gained after the decision, but with the Fed reinforcing its higher for longer mantra, the krone (EUR/SEK 11.96) again nears its all-time low against the euro. The Norwegian central bank acknowledges that inflation stays markedly above the 2.0% target. Headline inflation in August eased more than expected to 4.8% Y/Y but underlying inflation still was 6.3%. In its new projections the NB expects underlying inflation well above target through 2026. Growth is seen slowing to 0.4% next year. Despite this, the NB sees the policy rate being raised further to about 4.5% to stay there throughout 2024. The krone since June strengthened modestly from about EUR/NOK 12+ to currently trade near 11.52. A rebound attempt after the NB rate hike failed.
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