Markets
Better than expected China Q3 growth data failed to inspire risk assets. US (real) yields nearing/touching cycle peak levels clearly dampened optimism. Geopolitical tensions also returned to the forefront as a meeting of US President Biden with Arab leaders was canceled after a deadly explosion at a hospital in Gaza. Uncertainty on upcoming developments in the conflict (and on diplomacy to prevent a further escalation) propelled Brent oil to the $93 p/b level (currently $92 p/b). A further rise in the oil price clearly serves as a ‘risk premium’ to the global economy at risk of both eroding already fragile growth and at the same time reinforcing price pressures. European equities are ceding between 0.5%-1.0%. US equities open up to 0.5% lower. As was often the case of late, even the combination of elevated geopolitical tensions and economic uncertainty still doesn’t trigger the usual safe haven run to core bonds. Even after yesterday’s sharp losses on stronger than expected US retail sales, bonds get little help from aggressive (safe haven) dip-buyers. Stronger than expected September US housing starts only help to put a floor for US yields. US yields currently trade between unchanged (2-y) and 5 bps higher (30-y). The 2-y yield continues testing yesterday’s multi-year close near 5.20%. Similar story for the 5-y (4.88%), 10-y (4.87%) and 30-y (4.98%). The former intraday briefly touched the highest level since July-2007. Fed’s Harker in an interview with the WSJ said he thinks the Fed can wait until early next year to assess whether previous hikes have done enough to bring inflation back under control. Question is whether he is expressing the majority view. European interest rate markets show a similar picture with the 2-y German yield ‘losing‘ 1 bp but the 30-y adding 4.0 bps. Moves in intra-EMU government bond spreads stay orderly. However, at 2.05%, the 10-y Italian spread against Germany is revisiting recent peak levels.
On FX markets, the dollar performance remains unconvincing. DXY gains marginally (106.30). EUR/USD (1.0555) is holding below the downtrend line since the August peak. USD/JPY is blocked close to just below the 150 barrier as investors ponder the chance of potential interventions. At the same time all kinds of rumours continue to swirl on the BOJ tweaking its ultra-easy policy in a not that distant future.
After a softer than expected (incomplete) UK labour market report, higher than expected UK September CPI (headline 0.5% M/M and 6.7% Y/Y (changed), core 6.1% Y/Y from 6.2%) reopened the debate on additional BoE tightening. While close to expectations, the report didn’t provide to faster disinflation the BoE is hoping for. Gilts underperform Treasuries and Bunds with UK yields rising between 7 bps (2-y) and 10 bps (5-y). Still, markets only see a limited 20% chance of the BoE again hiking rates already at November meeting. Sterling is holding stable against the dollar (1.218). EUR/GBP at 0.867 (for now) avoids a new test of the key 0.87 resistance.
News & Views
Riksbank deputy governor Floden said in a speech that inflationary pressures remain far too high: “It is becoming increasingly clear that monetary policy needs to stay contractionary for quite some time to come.” He warned that the weak krone isn’t helping the inflation fight. The rebound from the all-time low near EUR/SEK 12 to 11.60 currently isn’t sufficient to change fortunes. In separate comments, governor Thedeen added that he hoped that investors took inspiration from the Riksbank’s recent FX hedging strategy where it sells USD and EUR. He labels it risk management though and not interventions. Underlying and 3-month inflation is still too high, keeping the door wide open for an extra 25 bps rate hike at the central bank’s November 23 policy meeting. Money markets currently discount a 52.5% probability.
Iran foreign minister Amirabdollahian called for an immediate and complete embargo against Israel by Islamic countries, including an oil embargo. Brent crude temporary spiked to $93/b, but couldn’t hold on to gains dropping back to the low $91/b area currently.
 UK labour market report, higher than expected UK September CPI (headline 0.5% M/M and 6.7% Y/Y (changed), core 6.1% Y/Y from 6.2%) reopened the debate on additional BoE tightening. While close to expectations, the report didn’t provide to faster disinflation the BoE is hoping for. Gilts underperform Treasuries and Bunds with UK yields rising between 7 bps (2-y) and 10 bps (5-y). Still, markets only see a limited 20% chance of the BoE again hiking rates already at November meeting. Sterling is holding stable against the dollar (1.218). EUR/GBP at 0.867 (for now) avoids a new test of the key 0.87 resistance.){kind=link}