Markets:
New month/quarter, but no profound change in market trends. On the contrary. After a brief rebound of bonds on Thursday and on Friday, previous trends apparently still have some way to go, especially if this week’s US data confirm ongoing resilience in activity and/or key labour market. The US avoiding a government shutdown and a solid Japan BOJ tankan report in essence shouldn’t be major news for markets. Even so, it’s enough a pretext for yields to take the way north again. A lot of Fed and ECB speakers are scheduled to give their view this week. Recent comments suggest that a majority of the Fed governors is holding to the narrative that an additional rate might be needed to balance supply and demand in a way that is enough to bring inflation to target in a sustainable way. In this respect, Richmond Fed president Barkin made some interesting remarks on the strength of the housing market, with housing prices hardly declining despite the Fed’s aggressive hiking cycle. If the housing market turns out to have made a secular shift, becoming less sensitive to higher interest rates, it might be necessary that prices in other parts of the economy should lessen a bit more. Whatever the reason, US yields are rising between 7 bps (5-y) and 6 bps (2y & 30-y). The US manufacturing ISM, to be released after finishing this report is the first really important reference. Fed Powell also joins a roundtable discussion later today. In case of a solid ISM report and/or hawkish message from Powell, US yields at maturities >5-y have a good chance of ending the day at new cycle peak closing levels. European bonds again outperform their US counterparts with German yields adding between 1,5 bps (2-y) and 5 bps (30-y). European investors are reluctant to already place bets on an additional ECB hike. However, the global ‘higher for longer narrative’ and trend for higher real yields at longer maturities also protects the downside in European yields. The start of the new quarter, didn’t inspire equity investors. The Eurostoxx 50 is ceding 0.5%, holding well below the previous 4200 range bottom. US indices also open with small losses. After taking a breather end last week, the dollar firmly takes the upper hand. The TW DXY index jumps from 106.17 late on Friday to currently 106.55. EUR/USD at 1.053 again has the 2023 low (1.0484) on the radar. USD/JPY (149.8) is only a whisker away from the 150 barrier. Markets are pondering the chances of MoF interventions to prevent further yen losses. Question remains on the efficacity of such action if an important part of the driver of the move is USD strength, next to yen weakness. Sterling gains marginally against the euro (EUR/GBP 0.866) but is holding within its recent consolidation pattern (0.863/0.8706).
News & Views:
The Czech manufacturing PMI fell more than expected in September (41.7 from 42.9 vs 42.5 consensus). The PMI fell below the 50 boom-bust mark in June last year and hasn’t really recovered since. Another sharp monthly contraction in new orders dragged output, with foreign client demand also dissipating amid challenging economic conditions in key export markets. Jobs were cut at the sharpest pace in over three years. Efforts to cut costs and improve cash flow led to the steepest drop in stocks of purchases in over 14 years. Pre-production inventories and stocks of finished items shrank as well. Muted demand for goods and inputs sparked further cuts to input costs and output charges, as firms and suppliers alike sought to drive sales. Czech goods producers still anticipate higher output over the coming year, but the degree of optimism dropped to the lowest in 2023 so far. The Czech PMI bolsters the case for CNB rate cut. The central bank indicated last week that both November and December gatherings are “live” meetings. Our preferred scenario is a 50 bps rate cut in December. The Polish manufacturing PMI improved marginally (43.9 from 43.1 vs 43.6 consensus). Details showed similar broad-based weakness like the Czech reading with further sharp falls in new orders, output, backlogs and input purchases albeit more slowly than in August. Employment was cut at the fastest in a year. Both input and output prices fell for the sixth month running. On a small bright note, forward-looking Future Output Index signaled the strongest 12 month outlook since March. The Polish zloty stabilized in the EUR/PLN 4.6-4.7 range after being whacked by the NBP’s unexpected 75 bps rate cut early September. NBP and government officials afterwards pushed back against the idea of similar cuts in October. The NBP will announce its policy decision on Wednesday.
