Sunset Market Commentary

Markets:

Yesterday’s sudden drop in USD/JPY remained talk of town. The pair breached last year’s intervention-threshold (150) following stronger US JOLTS job openings before suddenly sinking to 147.50. While top officials declined to say if they had intervened, Finance Minister Suzuki did tell media that they are watching FX with a high sense of urgency, that excessive FX moves are undesirable and that it is important that currencies move stably. In our humble opinion, we find that yesterday’s move had intervention written all over it. If it weren’t for the bond correction we are seeing today, USD/JPY (148.85 currently) would already be again in the dire position it was in yesterday. Without real policy shift by the BoJ, JPY won’t find a proper support despite trading at multidecade lows.

Core bond yields hitting some high profile levels (eg Germany 10-yr 3%, US 30-yr 5%) took the sting out of the post-FOMC core bond sell-off today. There were no specific drivers that caused the turnaround just as the past couple of sessions lacked strong evidence to the significant weakness. It did say a lot about underlying bearish core bond momentum though inspired by higher real rates. US yields today lose around 6 bps across the curve. The eco calendar contained September ADP employment change which gave evidence that the labour market is turning more into balance from extreme scarcity. The net job creation of 89k disappointed compared to consensus (150k). It was the lowest monthly figure since the positive streak of job gains started back in February 2021. Leisure and hospitality (+92k) drove the September gain, offsetting job losses at professional and business services (-32k), manufacturing (-13k) and trade and transportation (-12k). The bulk of the job losses (-85k) came at large enterprises. ADP added that workers who stayed in their job saw a 5.9% Y/Y median pay increase which was the smallest in two years. It coincides with a pick-up in the labour force participation rate (62.8% last month; highest since March 2020 and near pre-pandemic (2014-2019) levels). The US September services ISM was bang in line with consensus (53.6).

German yields today lose up to 4.2 bps at the very long end of the curve with the front end trading flat. ECB president Lagarde stuck with the view that the ECB will ensure that interest rates will be set at sufficiently restrictive levels for as long as necessary. The dollar ceded some ground with EUR/USD changing hands at 1.0516 from an open at 1.0467. European stock markets rebound 0.50% with key US indices opening with modest gains (S&P 500+0.35%)

News & Views:

The Italian Statistical of Office (Istat) published the Q2 non-financial general government account. The net government deficit for H1 2023 was 8.3% of GDP, only marginally lower from 2022 (8.4%). The primary balance was also little changed at -4.4% from -4.3%. Both YTD revenues and expenses as a percentage of GDP eased to respectively 44.2% and 52.5% (from 45% and 53.4% last year). Interest rate expenses at €38.23bn even were slightly lower than in H1 2022 (€38.91bn). The Italian government last week raised its 2023 deficit target to 5.3% of GDP from 4.5%. The 2024 expected deficit was increased from 3.7% to 4.3%. The 2022 deficit was 8%. Other data showed that gross disposable income of households fell by 0.1% over the previous quarter, while their final consumption expenditure grew by 0.2%. Households’ saving rate was 6.3%, 0.4 percentage points lower than in the first quarter of 2023. A combination of the deterioration in the Italian budget and higher global (real) yields pushed the 10-yr yield spread between Italy and Germany close to 200 bps compared to a YTD low of 156 bps mid-June.

Hungarian retails sales were 7.1% Y/Y lower in August (from -7.6% in July and vs -5.7% Y/Y consensus). Sales decreased by 0.5% M/M. Sales volumes for the January–August 2023 period were 9.6% lower than in the corresponding period of the previous year. Domestic demand is an important parameter both for monetary and fiscal policy. Next to lower commodity prices and government measures to strengthen market competition, the MNB sees subdued domestic demand as an important factor contributing the expected further decline in inflation that should allow the bank to ease monetary policy further. For the government, tax on consumption (VAT) is an important source of revenues. The government yesterday raised its 2023 budget deficit target to 5.2% of GDP from 3.9% which was said to be due to increased spending on pensions, energy subsidies and family subsidies, but lower than expected revenues due to poor domestic demand probably were also in play.