Markets
A series of weaker-than-expected national inflation figures culminated in the first sub 2% European-wide reading for September today. The 1.8% y/y outcome was the lowest since April 2021 with the first negative m/m (-0.1%) print since January this year. The limited details available yet do show it’s mainly an energy-driven event, with favourable base effects pushing prices a whopping 1.6% down in m/m terms (-6% y/y). There’s ongoing stickiness in services inflation, which barely eased from 4.1% in August to 4% last month. Core inflation (ex. food and energy) decelerated as slightly as consensus expected: from 2.8% to 2.7%. ECB president Lagarde fired up the debate about an October cut yesterday before the European Parliament. Markets are all but certain the ECB will pull the trigger for such a back-to-back move. They even added to their bets today (+/- 93% discounted) with the likes of Finish governing council member Rehn supporting the case. He said it’s too early to declare a soft landing and said there are more grounds for cutting rates at the October meeting. We think the implications of today’s data for the October meeting are less straightforward as money market pricing currently suggest. But it’s duly noted. The European yield curve move is interesting though with significant long end outperformance (-10 bps in Germany’s 30-yr, -4.4 bps in the 2-yr). With an October (and December) cut basically priced in and a terminal rate of a mere 1.75% (vs. 2-2.5% neutral), downward market pressure on yields now seems to shift towards longer maturities. The 10-yr yield snapped below the August low of 2.078%, triggering a technical acceleration that’s currently running to 2.03%. US Treasuries underperform a tad, with yields declining between -1.8 (2-yr) to -6 bps (30-yr) ahead of the first key data of this week. Dollar-favourable interest differentials push EUR/USD below the 1.11 handle. DXY advances towards 101.2.
US job openings picked up from 7711k to 8040k in August, defying expectations for a decline to 7693k. The manufacturing ISM came close to expectations on a headline basis (47.2 vs a marginal uptick to 47.5 expected). The underlying components were unconvincing with the order book only shrinking at a slower pace (46.1 from 44.6). Employment is declining at an accelerated tempo though (43.9), nearing the post pandemic low of July. Prices paid dropped in contraction territory for the first time this year. US yields extends their initial declines in a first response that’s concentrated at the ISM rather than the JOLTS. The dollar pares some of the earlier gains.
News & Views
The Riksbank published the minutes of the September 25 policy meeting when it decided to further reduce the policy rate by 25 bps to 3.25%. The RB flagged the possibility of a 50 bps step at one of the two remain meetings. It also sees room for one or two additional cuts next year. Deputy governor Perr Jansson raised the issue how the RB should react to headline inflation falling substantially below 2.0% (1.2%). The RB takes a symmetrical approach on over- and undershoots. Even so, developments in the real economy also play a major role in its assessment why it is now appropriate to opt for a slightly greater easing in monetary policy. Now that upside risks to inflation are clearly smaller than before, it is a good time to try to stimulate the real economy. It is important in itself that economic activity strengthens, but it is also a condition for inflation to stabilize near target. Most other governors with nuances mostly joined this analysis. Governor Thedeen ‘summarized’ that cuts in larger steps, given the favourable inflation outlook, this is now part of the RB gradual monetary policy strategy. The krone didn’t show much of a reaction to the soft RB assessment which is probably to a large extent discounted. EUR/SEK traders near 11.85.
The EU announced that from October 7 2024, it will launch its Repurchase Agreement (Repo) facility. According to the statement, the facility marks the implementation of the final measure to support the EU bond market that the EU committed to in its communication from December 2022. It marks a natural next step in the development of the EU as an issuer. The introduction of the facility aims to strengthen the role of EU-bonds as liquid and safe collateral, following the exponential growth in the secondary market. Under the facility, the EU will offer its Primary Dealers the possibility to source specific EU-Bonds on a temporary basis. By acting as a backstop to the Primary Dealers’ secondary market activity, the facility will allow investors to be more confident in the terms on which they can trade EU-Bonds in the secondary market, improving the overall efficiency and fluidity of the EU-bonds market, the statement says.
Graphs
EUR/USD: euro slides as money markets up bets for an October cut following Rehn’s endorsement and sub 2%-inflation print
German 10-yr yields snaps below August low. Downward market pressure shifts to longer maturities as front-end gets very crowded
EUR/SEK: SEK shrugs at Riksbank officials openly flirting with 50 bps cuts in September meeting minutes, suggesting it’s priced in
Brent oil ($/b) looks for a short-term equilibrium between $70-75 as China boost fades
 print since January this year. The limited details available yet do show it’s mainly an energy-driven event, with favourable base effects pushing prices a whopping 1.6% down in m/m terms (-6% y/y). There’s ongoing stickiness in services inflation, which barely eased from 4.1% in August to 4% last month.){kind=link}