Markets
With central banks in full data dependence mode, every eco figure counts. It makes trading more volatile from one policy meeting to the next. A disappointing September PMI survey and confirmation of the disinflation trend convinced the ECB into conducting back-to-back rate cuts in October and convinced markets that a 50 bps December rate cut could be in the cards. Today’s data show that the ECB was trigger-happy and that (EMU) money market better pare those acceleration wagers. We pointed out the discrepancy between soft EMU survey data and more robust hard data. Since the former are released in a more timely manner, they tend to grab most attention. For once it’s the other way around. The gap between a PMI-prognoses flat quarterly growth figure and the effective 0.4% Q/Q print was even bigger than expected. On a national level, Spain stuck with its stellar 0.8 Q/Q growth, while both France (0.4%) and Germany (0.2%) beat consensus. Italy (0%) was the outlier with net exports working as a drag. GDP data helped EUR/USD together with national inflation prints to an intraday top of 1.0859, creating more breathing space around the 10778/61 support zone. Inflation is the second piece of the puzzle. The ECB knew in advance that base effects would lift headline inflation rapidly back above the 2% inflation target after a one-off lower in September. National numbers in Spain show a 0.6% M/M and 1.8% Y/Y increase with core PCI unexpectedly ticking up to 2.5% Y/Y. Belgian inflation rose by 0.5% M/M to 3.2% Y/Y. German inflation accelerated from 0% in September to 0.4% M/M in October (vs 0.2% expected) with the annual reading up at 2.4% Y/Y (from 1.8%). EMU numbers will be published tomorrow. Daily changes on the German yield curve range between +4.6 bps (2-yr) and -3.4 bps (30-yr) compared to yesterday evening’s close. However, we must add a significantly lower opening, copying the late swoon in US yields yesterday (related to Trump losing his 56-44 lead against Harris in election prediction models?). The US agenda was buzzing as well today. ADP employment change showed 233k net job growth in October, the most since July 2023, with a 15k upward revision for September and smashing 111k consensus. The US economy continued to grow at a solid pace in Q3 (2.8% Q/Qa) with consumption against amongst the drivers (+3.7% Q/Qa). Core PCE rose by 2.2% Q/Q, slightly stickier than 2.1% consensus. Pending home sales completed the hattrick, rising an impressive 7.4% M/M (2.2% Y/Y). US yields made an obvious attempt to build on this month’s gains on such good eco data, but the move lacked strength with nearby US elections causing some paralysis as well. Daily changes currently range between +3.8 bps (2-yr) and -3 bps (30-yr).
News & Views
UK Chancellor Reeves presented the first Labour budget before Parliament today. A raft of tax increases is projected to raise some £40bn to boost spending on public services and to cover a £22bn fiscal “black hole”. It’s the biggest revenue-raising package in a generation, consisting of an increase in the Capital Gains Tax and in the national insurance payroll tax for businesses. Reeves also lowered the threshold at which companies start paying the latter. On spending, she raises minimum wages and pensions but income tax thresholds will not be frozen beyond 2028-29. Reeves pledged to raise defense spending to 2.5% of GDP. With the hefty tax increase, Reeves seeks to balance day-to-day spending with revenues. This stability rule is met in 2027-28, two years earlier than required. Reeves tweak to the debt measure the government uses for its long-term debt reduction target frees up $70bn in additional room to invest. The autumn Budget comes with new OBR forecasts. Growth for this year and the next was upgraded to 1.1% and 2% and will vary between 1.5% and 1.8% in the four years after. CPI will average 2.5% in 2024 before picking up to 2.6% in 2025 and only settling at 2% by 2029. The OBR said the “Budget increases spending by £70 billion annually, with two-thirds on current and one-third on capital spending. Half is funded through tax increases which raise £36 billion annually and push the tax take to a record 38% of GDP. The rest is funded by £32 billion more borrowing annually.” It speaks of one of the “largest fiscal loosening in recent decades.” The UK’s Debt Management Office also updated borrowing forecasts for the occasion. It raised planned gilt sales for 2024-2025 to just shy of £300bn. That’s up £20bn compared to the April revision but in line with expectations. UK bond markets needed some time to digest Reeves’ plans. Gilts sell off across the curve, pushing yields between 4-8 bps higher; the front end underperforming. Sterling lost ground and trades in the meantime at EUR/GBP 0.835.
