Markets
The Bank of Japan brought the Japanese yen close towards new multidecade lows against the US dollar. USD/JPY pierced through 150 and then the 151 big figure. The couple rose to an intraday high of 151.95 in October last year before Japan turned to FX interventions. Ending the day at the current levels would nevertheless mean the strongest USD/JPY close since 1990. EUR/JPY rises beyond 160 for the first time since 2008. The yen is paying the price for the BoJ’s tedious normalization pace. It demoted the hard 1% yield cap on the 10-year tenor to merely a “reference”. It means the central bank won’t act on autopilot if yields move beyond that level. Markets are ready to test the BoJ’s resolve and sent yields in the country 1.1-5.5 bps higher. Japanese bond markets are actually an outlier compared to global peers. That makes today’s JPY move very telling. German yields ease 0.3 (2-y)-4.5 bps (30-y). European data were interesting more than they were meaningful to investors. The economy unexpectedly contracted in Q3 (-0.1% q/q). It keeps the possibility for a technical recession in 2023H2 which PMI-owner S&P Global warned for last week alive. October inflation in the bloc was softer than anticipated, with a 0.1% m/m increase leading to 2.9% y/y (from 4.3% in September). Very favourable base effects (energy-related) explain a lot of the sharp disinflation. Core CPI is much more sticky at 4.2% (from 4.5%) with services inflation even barely easing (4.6% from 4.7%). US yields fell between 4.4-9.3 bps at their lowest point of the day before suddenly spiking on an unexpected acceleration in the Employment Cost Index for Q3 (1.1%, up from 1% in Q2). Fed’s Powell has repeatedly said the ECI is one of the key indicators the central bank is watching to gauge labour market hotness and the inflation risks it poses. A batch of US housing data later showed y/y prices further bottoming out for a third month straight. Current changes in US yields vary between +0.6 bps (2-y) to -4.8 bps (30-y). Equity markets feel like rallying in Europe (SX5E +1%). US stocks erased opening losses. Aside from JPY, the US dollar also strengthens against other global peers. EUR/USD swapped gains for losses after the ECI release with the pair just holding on north of 1.06. DXY rises towards 106.54.
With today’s key events (BoJ) and eco data out of the way, markets are now looking forward to tomorrow’s Fed meeting. The US Federal Reserve will skip on hiking its policy rate for a second meeting straight. Economic data since the September Fed meeting scream for the final (flagged) hike, but Fed-governors joined forces to downplay such action as the yield increase at the long end of the curve (tightening of financial conditions) substitutes for such move. We believe that Fed chair Powell will keep the option open for December (<30% market implied probability) or risk a further increase in inflation expectations which since that same Fed talk rose to match the (March) YTD high at 2.5%. The US 2-yr yield risks losing the 5% in case of a dovish skip (not our preferred scenario).
News & Views
Czech GDP unexpectedly shrank in the third quarter (-0.3% Q/Q) with y/y-comparison unchanged at -0.6% Y/Y. The supply-side breakdown suggests negative contributions coming mainly from industry, trade, transportation, accommodation and food services. Information and communication and professional, scientific, technical and administrative activities recorded positive growth. From a demand-side view, household consumptions and gross fixed capital formation weighed while exports had a positive influence. Czech employment decreased by 0.7% Q/Q, being up 0.5% Y/Y. Today’s GDP figures strengthen the case for the start of the policy rate cut cycle at Thursday’s meeting. We expect the key rate to be lowered by 25 bps to 6.75%. Czech swap rates cede up to 11.5 bps at the front end of the curve today (2y). The Czech koruna nevertheless stands its ground against the euro, trading level around EUR/CZK 24.55.
Polish inflation slowed to 0.2% M/M in October (from 0.4% in September vs 0.3% expected). In Y/Y-terms, inflation decelerated from 8.2% to 6.5% (vs 6.6% forecast). It’s the lowest level since September 2021. Fuel prices are the main culprit, crashing 4.2% M/M and 14.4% Y/Y. Food and non-alcoholic drink prices rose for the first month since May (0.4% M/M with Y/Y-growth falling from 10.4% to 7.9%. Electricity and gas prices rose marginally (0.2% M/M & 8.3% Y/Y). Polish markets didn’t respond to the near-consensus figures. Money markets expect the National Bank of Poland to proceed with another 25 bps rate cut in November.
