Sunset Market Commentary

Markets

Softer-than-expected European October PMIs were a perfect excuse for core bonds to build on yesterday’s remarkable intraday U-turn. In a Germany-led decline, the composite figure dropped from 47.2 to 46.5, more than offsetting the September uptick . Both manufacturing (43.0 from 43.4) and services (47.8 from 48.7) are in contraction territory at the start of 2023Q4. PMI owner S&P Global called the situation moving from bad to worse, expecting a recession with back-to-back negative quarterly growth in Q3 and Q4. New orders continue to drop at one the quickest paces since 2009 in manufacturing and January 2021 in services. In response to the activity slowdown and accelerated depletion of backlogs, the private sector shed personnel for the first time since January 2021 even as the service sector’s gauge still printed slightly above the neutral 50 barrier. Input costs fell across the private economy but cost inflation in the services sector remains higher than at any time in the pre-pandemic period since 2008 with wages often cited as a key driver. Prices charged (output inflation) rose at a marginally weaker rate in October than in September at the lowest since February 2021. The PMI publication coincided with the ECB’s Q3 lending survey, which showed credit standards having tightened further across all loan categories and loan demand retreating strongly. It all but cements the ECB’s expected rate pause at Thursday’s meeting. Lagarde in a call on Monday with high-ranked European officials said the economy faces stagnation for the next few quarters while adding that the fight against inflation is going well. German yields at a given point dropped almost 10 bps at the long end of the curve but quickly pared much of those losses. Net daily changes eventually amount to 0.1-3.8 bps. US Treasuries underperformed with yields adding to earlier gains after all US PMIs unexpectedly returned above 50, even if it is marginally. Changes vary between 1.7 (30-y) and 6.4 (2-y) bps adds 3.4 bps. The US dollar recoups some of the losses incurred in yesterday’s afternoon (European) trading. EUR/USD turned from close to but below 1.07 to just north of 1.06 currently. DXY bounced off 105.38 support to just shy of 106. UK PMIs were not at all convincing either (48.6 composite) but given their close-to-consensus outcome, sterling was temporarily able to take the upper hand against a euro in the defensive. EUR/GBP hit an intraday low of 0.8683 but isn’t planning to give up the 0.87 big figure that easily. The Hungarian forint is steady around EUR/HUF 381 and doesn’t underperform regional peers (CZK, PLN) after the central bank cut rates by a more than expected 75 bps to 12.25%. Front end yields drop up to 20 bps. Hungarian money markets expect the policy rate to further decline to around 10% by end 2023. Stocks in Europe rise 0.2%, erasing early losses. Wall Street opens with 0.4-0.8% gains.

News & Views

The October ECB Bank lending survey showed that credit standards (internal guidelines or loan approval criteria of banks) for credit to enterprises and to households tightened further in Q3. In both cases it exceeded the sector’s previous expectation. For Q4, Euro Area banks expect more tightening for loans to firms and for consumer credit, but they see broadly unchanged conditions for loans for housing purchases. At the same time banks reported a sharper than expected decline in loans of all categories (firms and households). The decline was mainly driven by higher interest rates as well as lower fixed investment and weaker consumer confidence. For Q4, banks see a further net decline in demand across all loan categories, albeit less pronounced than in Q3. Banks reported a deterioration in access to funding, especially retail funding due to increased competition for liquidity and other alternatives. The ECB reducing the asset portfolio contributed to the deterioration in market financing conditions and banks’ liquidity positions. This also applies to the phasing out of TLTRO operations. Banks project the positive impact of higher ECB interest rates on net interest rate margins to abate in de coming months. Further negative impact via higher provisions/impairments might be on the cards.

Spain’s Socialist Party and the Far-left Sumar group reached an agreement on a coalition. Amongst other plans, they intend to reduce the workweek to 37.5 hours. However, the coalition still needs to support of other parties, most probably of some parties advocating more independence for Catalunya. Acting PM Sanchez has until 27 November to find enough support in Parliament for a new term. If not, new elections will be called for January.