Cautious Risk Environment Prevents Dollar from Stacking Up Losses

Markets

Core bonds slid for a second day straight yesterday. US Treasuries underperformed Bunds following (very) strong September retail sales and industrial production figures. NAHB housing market confidence slipped more than expected in October to the lowest since February (from 44 to 40) but its impact was either non‐existent (at the short end of the curve) or only temporary (long end). US yields rallied between 7.4 bps and 15.3 bps. The 2‐y yield (+11.1 bps) hit the highest level since 2006 (>5.20%). The 10‐y tenor closed above 4.8% for the first time since 2007. German yields added between 5.3 and 10.1 bps, bringing the short and long end of the curve about 15 bps away from their respective cycle highs. Word about Biden’s “de‐escalation” summit with Arab leaders being cancelled reached the market only after closing hours. The reason was a deadly strike on a hospital in Gaza City, which Israeli and Hamas blame each other for. Core bond yields contain their disappointment in a first reaction during Asian dealings. US cash yields ease less than 2.5 bps. Stock markets yesterday ended a volatile day little changed. The dollar forfeited its initial, early gains against the euro (EUR/USD 1.0577). The US currency did close higher against several other global peers, limiting the losses for DXY (stable at 106.25). Sterling traded on the backfoot amid huge gilt outperformance following a weaker‐than‐expected but incomplete labour market report. EUR/GBP rose from 0.864 to 0.868. China’s yuan is doing slightly better this morning after slightly better‐than‐expected Q3 growth figures (see below). With the property being an obvious drag still, it’s not a huge reason to cheer. USD/CNY eases to 7.30. The Japanese yen sits around USD/JPY 150. Yields in the country are on the rise. The 10‐y yield adds 3 bps to a new fresh decade high (>0.8%), prompting an unscheduled bond buying operation by the BoJ. Sentiment turned more sour again in Asia with equity indices losing 1% and more in China & Taiwan. Several non‐bank companies are reporting earnings today. The season is gaining traction and could become important for general market sentiment in the upcoming days. Geopolitics are too but it’s anyone’s guess how the conflict will evolve. ECB’s Stournaras in an interview with the Financial Times and Holzmann both noted that the situation in the Middle East could be stagflationary but differ on the potential implications for monetary policy. After the recent sharp moves and with the long end nearing cycle highs, we wouldn’t be surprised to see yields taking a breather today. A cautious risk environment prevents the dollar from stacking up losses. EUR/USD 1.064 serves as a first resistance. After yesterday’s wage data UK (core) inflation this morning tops estimates, offering conflicting signals what to expect from the Bank of England in November. Sterling ekes out a tiny gain to EUR/GBP 0.8675.

News and views

China Q3 GDP growth came out stronger than expected. Growth amounted to 1.3% Q/Q and 4.9% Y/Y (vs 0.9% Q/Q consensus and 0.5% Q/Q in Q2). YTD growth printed at 5.2% Y/Y (from 5.5%). The Q3 release suggests that the government might be on track to reach its full year growth target of about 5%. The data suggest that stimulus efforts are finally delivering. September data also surprised on the upside. Retail sales jumped from 4.6% Y/Y to 5.5% Y/Y. Industrial production at 4.5% Y/Y also was marginally stronger than expected. The jobless rate declined from 5.2% to 5.0%. The property sector continues to struggle with YTD property investments drifting further into negative territory (‐9.1% YTD Y/Y). There was no market euphoria after the data. The CSI 300 equity index is holding negative territory (‐0.7%). The yuan gains but at USD/CNY 7.3065 already reversed part of the initial gains.

In a speech yesterday, the governor of the Czech National Bank (CNB) Michl indicated that the internal debate on easing policy has started and that the CNB internally agreed on a strategy. However, in line with comments from other board members recently, he stressed that any easing will be gradual. The CNB governor didn’t make any commitments on concrete steps at the two remaining meetings this year. Decisions will be taken on the basis of new data and staff forecasts. Whatever they will be, Michl said that the CNB will remain hawkish and continue to protect the country from future inflation. We expect a 25 bps policy rate cut (currently 7%) after better than expected September inflation data (6.9% Y/Y) published last week. However, in a gradual approach the December meeting might also still only result in a next 25 bps step to 6.5%.