Sunset Market Commentary

Markets

The first governors already hit the wires today after yesterday’s ECB meeting. Muller (Estonia), Vasle (Slovenia) and Nagel (Germany) all carry a hawkish label but seem to be at peace with the ECB holding rates steady for the first time in more than a year. They said that inflation remains too high but monetary policy is showing effect and should keep disinflation going. For Muller it’s the economy that will determine how long rates stay at their peak. He expects some stagnation before a gradual recovery in 2024. Nagel pulled the data-dependency card, with future decisions made on a meeting-by-meeting basis. Their comments didn’t have much impact on markets though. German Bunds eke out small gains in what is mainly technically inspired trading. Yields ease 1.1-3.4 bps with the front outperforming. US Treasuries marginally underperform after rallying yesterday. The front end of the curve loses less than 2 bps. Longer tenors add 0.3-2 bps with the 30-y aiming for a close above 5%. Economic data included decent to strong personal income (0.3%) and spending (0.7%) but were offset by September (core) deflators just missing the bar due to a downward 0.1 ppt revision of the August reading. We wouldn’t draw any conclusion from today’s market moves anyway, not with the huge batch of key eco indicators and events looming next week. Get ready for European Q3 GDP and October inflation numbers, the US October labour market report and ISM business confidence and of course the FOMC policy meeting. The Czech National Bank, Norges Bank, Bank of England & the Bank of Japan gather as well.

Stocks trade pretty volatile. The EuroStoxx50 swung from losses to gains back to losses (twice). All indices on Wall Street opened with gains but only the S&P500 (+0.1%) and Nasdaq (0.80%) can currently maintain some of them. Though fragile, the minor improvement in risk appetite lifts the euro from the daily lows. EUR/USD is trying to find a spot back above the upward sloping October trendline again (1.0585). DXY trades a tad lower at 106.54. The Japanese yen gets some relief. USD/JPY might close the week below 150, the level at which Japanese authorities stepped in back in October last year. Sterling is absolutely going nowhere just north of 0.87. Outperforming today is the Australian dollar, in part thanks to a 1% gain in oil. The Swiss franc underperforms G10 peers.

News & Views

Today, the ECB published the results of the survey of professional forecasters for the fourth quarter of 2023. Respondents made limited revisions to headline inflation (HICP) expectations for the 2023-25. Headline HICP inflation was expected to decline from 5.6% in 2023 to 2.7% in 2024 and 2.1% in 2025. Expectations for 2023 were revised upward by 0.1 percentage points, those for 2024 were unchanged, and those for 2025 were revised downward by 0.1 percentage points. The upward revision for the short-term was reportedly reflected higher oil prices. Expectations for core inflation for 2024 (2.9% from 3.1%), for 2025 (2.2% from 2.3%) and for the longer term (2.0%) also were downwardly revised. So, respondents still expect inflation to return close to target at the end of the ECB’s policy horizon. Forecasters also downwardly revised expectations for growth this year (0.5% from 0.6%) and growth in 2024 (0.9% from 1.1%). 2025 growth (1.5%) and long term growth were seen unchanged. Despite lower growth, forecasters still saw the profile for the unemployment rate slightly lower of the forecast horizon (6.5%, 6.7% and 6.6% in 2023-25).

Retail sales in Sweden for the month of September again were reported weaker than expected. Sales volumes decreased 1.4% from August. Only a modest 0.3% decline was expected. Sales also were 3.8% lower compared to the same month last year. The negative monthly dynamic questions a trend of cautious bottoming that potentially developed since spiring. Poor growth and the impact of rising interest rates on highly indebted consumers complicates the task of the Riksbank to address still too high inflation in a more decisive way. At EUR/SEK 11.81, the koruna continues fighting an uphill battle. This occurs even as the Riksbank today announced that it again sold $ 360 mln and € 95 mln of reserves related to its program to hedge part of its FX reserves (week ending 13 Oct).