Markets
Unchanged. The Bank of England followed the European and US example and kept rates steady at 5.25%. The vote was not unanimous though, with 3 of the 9 members in favour of lifting rates 25 bps. At the heart of the decision lies a weak economy. GDP is projected to be flat in Q3 this year and to grow a negligible 0.1% in the running quarter. Both are softer than expected back in August. The BoE then expects zero growth for 2024 (with a 50% chance of a recession from Q2 on) and just 0.25% in 2025. The economy is seen in excess supply from 2024 through the end of the policy horizon (2026). Employment growth probably softened over the second half of this year and to a greater extent than thought in the summer. Based on market expectations for the policy rate to remain at the current level until Q3 2024 and then declining to 4.25% by end 2026, inflation (6.7% in September) should hit the 2% target by mid-2025 before dropping below as an increasing degree of economic slack reduces domestic inflationary pressures. Risks to the outlook remain skewed to the upside. The BoE retains the possibility of hiking further “if there were evidence of more persistent inflationary pressures”. Between the lines, however, we read a preference for keeping rates at the current level for longer over raising them once more. UK gilts hugely outperform global peers today, losing between 10.3 and 15.4 bps with money markets now convinced more than ever that tightening is over. While the BoE did have some impact, much of the losses already occurred before that in a catch-up move the US late yesterday. Sterling losses are contained. EUR/GBP bounces higher to 0.873.
Core bond yields extend yesterday’s decline. US rates ease another 0.1 (2-y)-11.4 (30-y) bps. An unexpected drop in Q3 unit labor costs (-0.8% q/q, the first decline since late 2022) amid a surge in productivity added to the move. Weekly jobless claims (217k) later topped the 210k estimate. German yields drop 2.4-8.1 bps with the long end outperforming. The 10-y yield touching 2.68% intraday effectively created the neckline of a double top technical pattern. For a second day straight, markets frontrunning the end of the tightening cycle in the advanced economies pushes equities comfortably higher. The EuroStoxx adds 1.9%, Wall Street opens about 1%+ higher. Risk on is hurting the USD. EUR/USD is testing resistance around 1.0635. DXY drops towards the 106 barrier. Even JPY is able to strengthen. USD/JPY 150 survives though.
News & Views
The Norwegian central bank unanimously decided to keep its policy rate unchanged at 4.25%. Based on the monetary policy committee’s assessment of the outlook, the policy rate will likely be raised in December even as inflation has fallen more than expected and economic activity has been somewhat lower than projected in the September Monetary Policy Report. The weaker currency poses upward inflation risks while underlying inflation needs to drop faster for the Norges Bank to hold its fire in December. If they hike, it will likely be the last move as the Committee assesses the policy rate close to the level needed to tackle inflation and with monetary policy having a tightening effect on the economy. There will likely be a need to maintain a tight stance for some time ahead to bring inflation down to the target, governor Wolden Bache admitted. NOK swap rates drop more than global peers today, losing 13 to 15 bps across the curve. The Norwegian krone suffers from the loss of rate support with EUR/NOK changing hands at 11.87, the highest level since June and compared to a YTD high of 12.11.
Swiss headline inflation rose by 0.1% M/M in October, with the Y/Y-figure stabilizing at 1.7%. Both were expected. Underlying core inflation however beat consensus rising by 0.2% M/M and 1.5% Y/Y (from 1.3% in September vs 1.4% forecast). The pick-up in core inflation was the first since February. Core CPI in between slowed from a 2.4% Y/Y-peak to a 1.3% low. The SNB meets only on a quarterly basis and kept its policy rate unchanged at 1.75% in September. More recently, SNB governor Jordan stressed that the central bank won’t hesitate to hike again if the outlook changes. Swiss money markets don’t believe that this will happen, discounting a 25 bps rate cut by March 2024 as the next move. The Swiss franc loses out against a strong euro today with EUR/CHF testing the recent highs around 0.9630.
