Sunset Market Commentary

Markets

German Bunds underperformed US Treasuries today. Yields added between up to 2.2 bps, the front end of the curve taking the lead. Yesterday’s PMI’s didn’t deliver a similar September-shocker and even offered a glimpse of hope for the battered German economy. That led some of the more hawkish ECB policymakers to come out of the shadows and push back against building market expectations for a 50 bps cut in December. Kazaks (“markets shouldn’t run ahead of themselves”), Muller (“best policy choice is measured rate cuts”), Wunsch (“don’t need a discussion on 50 bps at this stage”) and Simkus (“don’t see case for 50 bps cut”) all hit the wires. US yields ease a few basis points but remain on track for weekly gains from 6 (30-yr) to 12 bps (3, 5-yr). The euro ekes out a tiny gain on improving interest rate differentials in technically insignificant trading (EUR/USD 1.084). The trade-weighted dollar index eases few ticks and is testing the 104 big figure. EUR/GBP steadies around 0.834. The eco calendar contained US September durable goods data. The headline figure eased -0.8%, less than the expected -1% but came after the August number was revised down from flat to -0.8%. Core gauges beat estimates but a key one, shipments, missed the bar by unexpectedly dropping 0.3% m/m. The latter is a proxy for investments in GDP and is probably the reason why we’ve seen some intraday (yield) jitters: markets are headed towards an important eco calendar next week with the US, amongst others, publishing the first estimate of third-quarter GDP growth on Wednesday. Estimates are for a solid 3% q/q (annualized), matching the previous quarter’s pace. Other critical US data include PCE inflation (Thursday), October payrolls (for which the bar is pretty low because of an expected hurricane impact) and the manufacturing ISM (both on Friday). Next week are heydays for European number crunchers too. GDP growth on Wednesday may be better than the dire Q3 PMI readings suggest (0.2% vs flat) as hard data lately often deviated from soft indicators. European inflation numbers for October are scheduled on Thursday. Base effects should make clear that the current 2% undershoot is temporary at least through the end of the year. Investors are also keeping a close eye on the UK Chancellor presenting the Budget on Wednesday. Reeves already disclosed she’s altering the fiscal rules in order to create additional budgetary headroom of as much as £50bn over the coming years. Markets are on high alert. The Bank of Japan meets on Thursday. It won’t hike rates from the current 0.25% but it may hint at one in December. The Japanese yen sure won’t complain, having lost more than 10 big figures in just one month. The earnings season meanwhile also gains traction: Apple, Amazon, Intel, Microsoft, Meta Platforms, Alphabet and many others report.

News & Views

The ECB consumer expectations survey of September, inflation perceptions over the previous 12 months, for the next 12 months and for three years ahead all declined to respectively 3.4% (from 3.9% in August), 2.4% (from 2.7% and now the lowest since September 2021) and 2.1% (from 2.3%, the lowest since the Russia invaded Ukraine in February 2022). Expectations for nominal income growth rose slightly from 1.2% to 1.3% while those for spending growth over the next year remained unchanged at 3.2%. Stable expectations for spending and at the same time a lower inflation trajectory suggests a positive turning point for real spending, according to the comment in the survey. Consumers still see economic growth unchanged at -0.9% in the next 12 months with the unemployment rate rising to 10.6% from 10.4%.

The business survey of the National Bank of Belgium showed a small recovery in October. After successive declines since June the indicator rose slightly to -12.8 from -13.3. Business confidence improved in the building industry, trade and business-related service, but confidence in the manufacturing industry worsened. The improvement in the building industry was mainly due to an improvement in demand expectations and increased order books. The trade sector also expressed greater optimism on expected demand and intends to place more orders with suppliers. In business-related services respondents assess the current activity much more negatively but expect it to improve in the next three months. They also believe that general market demand will rise. The slight fall in manufacturing is mainly due to a more unfavourable assessment of total order books. The sector anticipates a slight drop in demand but is more optimistic about stock levels and expectations for employment.