Sunset Market Commentary

Markets

This morning the ‘official’ ONS UK September retail sales for the second consecutive month beat expectations by quite a substantial margin. Headline sales rose by 0.3% M/M and 3.9% Y/Y after a monthly rise of 1% in August and against expectations for a 0.4% monthly decline. Combined with a solid labour market report on Tuesday and softer than expect September inflation data published on Wednesday, this week’s data are important input for the upcoming BoE policy meeting on November 07. UK interest rate markets showed quite an asymmetric reaction function. No outspoken move on labour market data and/or retail sales but a substantial decline in (ST) UK interest rates after Wednesday’s CPI. Markets ‘feel’ that current still restrictive BoE policy allows a selective data reading from BoE governor Bailey and some other (likely even a majority) of his MPC colleagues. Markets still fully discount a next 25 bps rate cut at the November meeting and also hardly reduced chances for follow-up action in December. The combination of solid retail data, supported by positive real wages, at the same time supported by the BoE gradually reducing policy restriction for now proves reasonably good news for sterling. This is a fortiori the case for its performance against a vulnerable euro. EUR/GBP this morning briefly touched a new YTD low near 0.83. For now no sustained break occurred, but the downside in the pair still looks highly vulnerable. In case of a break the April/March 2022 lows at 0.825 and 0.8203 are next high profile reference on the technical charts.

Except for slightly weaker than expected US housing/starts and permits, there were no market relevant data in the US and EMU today. Markets mainly reassessed the impact of yesterday’s accelerated ECB easing. Reuters mentions sources close to the deliberations that inflation was seen easing to the target sooner than thought. This also caused some participants to open the debate whether the ECB should have dropped the pledge to keep policy tight. Also today, the ECB’s Survey of professional forecasters pointed to a slightly faster deceleration in 2025 inflation (1.9% from 2%). Nothing really spectacular, but it serves the current market bias. The German curve bull steepens with yields declining 4.5 bps (2-y) to 2 bps (30-y). Markets see slightly less that a 50% chance on a 50 bps ECB step in December. US Treasuries underperform with yields declining only 2-3 bps. Equities mostly trade in positive territory (Eurostoxx 50 + 0.62%). The S&P 500 opens in green with the all-time top still only a whisker away. After the tumbling early this week, oil is going nowhere ($74/b). Maybe a bit surprising given recent US data and ‘policy divergence’ between the Fed and the likes of ECB, but the dollar is falling prey to modest profit taking. DXY drops from the 103.8 area to currently 103.52. USD/JPY eased slightly to 149.9. Despite a growing interest-rate disadvantage, even EUR/USD rebounded from the 1.0825 area to currently 1.086. We don’t draw any firm conclusions on the USD correction yet. With markets focused on growth (or the lack of it) for next week we keep a close eye that the (US and EMU) PMI’s.

News & Views

People familiar with the matter indicate that Bank of Japan officials see little need to rush into raising rates later this month, according to news agency Bloomberg. They only see a small risk of prices outpacing the central bank’s quarterly projections (July), reducing the need to act quickly. US elections and the upcoming FOMC meeting are sources of uncertainty. At the October 31 policy meeting, the BoJ will probably discuss whether they can revise their July assessment that risks for prices are on the upside for this fiscal year and next. The base scenario remains one of higher interest rates down the road. The Japanese yen sticks to recent lows above USD/JPY 150.

Premature & Risky”: Governor Das on interest rate cuts in India. The Indian central bank kept its policy rate unchanged at 6.5% earlier this month, but turned more neutral in its forward guidance. Inflation has moderated after two years of unchanged interest rates. However recent inflation data has shattered the December rate cut narrative (25% probability). The economists now project end of first quarter for the first cut. Mr Das mentioned that he would like to see inflation comfortably settle around 4% and also reiterated that the central bank wasn’t behind the curve and called for extra caution. The RBI remains more bullish on Indian growth, sticking with forecasts of 7.2% for the current fiscal year, while the government’s projection stands at 6.5%-7%..