Sunset Market Commentary

Markets:

Risk-on? Risk-off? Ongoing geopolitical tensions in the Middle East suggest the latter at least should have some role to play. However, with (European) equity indices adding about 1.5%+, investors clearly see other drivers for trading. In this respect, the sharp decline in US bond yields this morning in our view is driven by recent Fed talk rather than geopolitical uncertainty. Fed’s Jefferson yesterday evening joined colleagues Daly and Logan elaborating on the idea that higher LT (real) yields recently did (part of) the Fed’s job to further tighten monetary conditions. A ‘final’ Fed rate hike to 5.50/5.75% might be necessary, or at least can be delayed. During the morning session, risk sentiment was further supported by news that the Chinese government is considering a new round of fiscal stimulus (> 1 trillion yuan?) and a higher budget deficit to reaccelerate domestic growth. The EuroStoxx 50 currently gains 1.8% . US indices open marginally in green after already a nice intraday rebound yesterday. Even so, a risk-rebound combined with lower (US) yields remain a difficult balance. Stocks are rebounding on the prospect of less aggressive Fed tightening. However, if this move goes too far monetary conditions would ease again, potentially undermining Jefferson’s call. To be continued. US yields currently ease between 9 bps (30-y) and 11 bps (5-y), compared to 15+ bps declines registered this morning. The focus now turns to this evenings’ $46bn 3-y US Note auction and Thursday’s US CPI release. German yields already regain 5.5-6.0 bps (after yesterday’s correction of about 10 bps). ECB’s Villeroy repeated the standard mantra that rates are currently at the right level and need to stay at a plateau for sufficiently long. On the hawkish side of the ECB spectrum, Austrian board member Holzmann warned that, if additional shocks enfold, the ECB might still have to hike rates further. Easing global market conditions also take some pressure off intra-EMU government bond spreads, with Italy (and Portugal) outperforming (10-y spread -5 bps). On FX markets, the dollar is still looking for direction. DXY struggles not to fall below the 106 barrier, but the decline is limited given the risk-on and fall in US yields. EUR/USD briefly surpassed the 1.06 barrier, but the 1.0617 end September up-tick was left intact (currently 1.059). USD/JPY outperforms most other USD cross rates regaining the 149 barrier. With again little UK specific news, EUR/GBP is captured in order-driven trading near the 0.865 pivot.

News & Views:

Czech inflation fell by more than expected in September (-0.7% M/M vs -0.2% M/M). The Y/Y-outcome slowed from 8.5% to 6.9% (vs 7.5%), the lowest since December 2021. Inflation figures were significantly below the Czech National Bank’s projections as well (7.2% Y/Y). This was due mainly to a stronger-than-expected slowdown in food price inflation (6% vs 7.3% CNB forecast), lower core inflation (5% Y/Y vs 5.5%) and to a lesser extent weaker administered price inflation (15.3% vs 15.6%). By contrast, the Y/Y-decline in fuel prices (-6.6% vs -15.3%) was less pronounced than forecasted. Growth in goods prices slowed in particular, while growth in services prices moderated to a lesser extent. The decline in services price inflation was due to most categories together with a continued decrease in the contribution of imputed rent. CNB expects the downward trend in Y/Y-inflation to temporarily halt in October due to a lower comparison base last year before falling rapidly to the upper bound of the tolerance band around the 2% target early next year. Czech swap rates drop up to 15 bps at the front end of the curve as today’s data suggest the CNB might start its rate cut cycle at the next, November, meeting. EUR/CZK tests the YTD high at 24.60.

Headline Norwegian inflation unexpectedly declined for a second consecutive month. Prices fell by 0.1 M/M while consensus expected a 0.7% M/M increase. The Y/Y-measure consequently slowed from 4.8% Y/Y to 3.3% Y/Y, the lowest since January 2022. Underlying core inflation rose by 0.4% M/M (vs 0.7%) and with the Y/Y-figure decelerating from 6.3% to 5.7% (vs 6.1%), the lowest since November of last year. Details showed housing, water, electricity, gas and other fuels dropping by 1.8% M/M with prices for food and non-alcoholic beverages 1.2% M/M lower. Norwegian swap rates lose up to 12 bps at the front end of the curve with money markets reducing the likelihood that the Norges Bank will deliver on its flagged December rate hike from around 65% to 50%. The Norwegian krone was one of yesterday’s outperformers on the back of a higher oil price, but posts a U-turn today with the pair currently changing hands around EUR/NOK 11.50 from 11.40.