Markets
The shape of the post-US election phase of the Trump trade were already crystal clear before the open of European markets. Donald Trump secured his second term as US president with supplementary institutional comfort of a Senate majority. Even a House majority remains a possible additional pillar to facilitate the implementation of his political agenda. US yields jumped sharply this morning. For now, tentative further follow-through action is running into resistance as US markets reopened. US yields currently add between 11 bps (2-y) and 22 bps (30-y) in a distinct bear steeping move. A resilient US economy might be pushed further to the limits of capacity, creating upside inflation risk, by a growth supportive fiscal and (de)regulatory policy. In this context, the Fed might sit back when assessing the need to prevent an unwarranted slowdown and/or cooling of the labour market. Last month’s repositioning continues. End September money markets saw the September Fed dots (50 bps additional easing in 2024 and 100 bps in 2025) as (much too) conservative, discounting a combined additional 75 bps for the November and December meetings and 150 bps of further easing next year. Currently, a 25 bps cut tomorrow still look safe. A next step in December is discounted for about 65%. Only 50 bps cumulative easing is seen left for next year. The reassessment at the long end is even more impressive, with the 10-y yield (currently near 4.45%) about 85/90 bps higher compared to the September low. Aside from potentially reduced/delayed Fed support, investors are also asking a higher US inflation and credit premium. For now, higher expected (nominal) growth still outweighs these risk premia for US equity investors. Major US indices are jumping between 3.0% (Dow) and 2% (S&P 500). Interestingly, European (and to a lesser extent UK) yields are parting ways with the US. The German curve also steepened, but with the 2-y yield easing 9 bps; the 10-y little changed and the 30-y rising 5.0 bps. Markets apparently see a more domestic oriented/’isolationist’ US policy as a potential reason for the likes of the ECB to ease policy more aggressively. We doubt this to be the ECB reaction function in a context of rising risk premia and a vulnerable euro. To be continued. Contrary the US, a weaker euro and lower yields aren’t enough for European indices to hold opening gains (Eurostoxx 50 -0.7%). Also something to watch, after a tentative rebound of late, oil is running into resistance (Brent $74 p/b from S76+ yesterday).
On FX markets, the dollar jumps sharply. Higher interest rate support, a strong domestic growth outlook, potential fall-out from higher tariffs on the economies of US trading partners and higher risk premia (admittedly also on US bonds) for now are a good reason for the USD to play ‘primus inter pares’. DXY jumps from a close yesterday at 103.42 to 105.25. USD/JPY adds from an open of 151.6 to 154.3. EUR/USD tumbles from the 1.093 area to test the 1.07 area. At this pace of correction, 1.0601 YTD low and 1.0448 (2023 low) might come within reach soon. Cable is also hit hard, (1.286 from 1.304), but outperforms the euro (EUR/GBP 0.8325). UK short-term yields decline only modestly compared to the big losses in EMU. Tomorrow’s UK policy meeting might bring some more clarity on the BoE reaction function especially after a (growth -supportive) budget of the Labour government announced last week.
News & Views
The Czech government in its freshly printed forecasts expects growth to pick up from 1.1% this year to 2.5% in 2025. The latter is a slight downward revision from the 2.7%. Increased household spending and corporate investment would drive the acceleration. The government aims to reduce the budget gap from 2.8% in 2024 to 2.3% of GDP next year. Finance minister Stanjura noted growth and inflationary risks from potential new export barriers, global supply disruption, ongoing weakness in the country’s main trading partner Germany, and, most importantly, from a potential trade war between the US and China. Annual inflation forecasts were left unchanged at 2.4% and 2.3% respectively, within the 2% +/- 1 ppt target range of the central bank. The latter is meeting tomorrow. Vice governor Zamrazilova last week said she’ll choose between a rate cut and a pause, being the first to float the latter option. She thinks rates have room to go lower still but is evaluating how to spread them in time instead of moving back-to-back. Markets and analysts nevertheless stick to a 25 bps rate cut to 4%. The Czech koruna, along with most other CE FX, lose ground in the wake of Trump’s victory but do trade off the intraday lows. EUR/CZK currently changing hands around 25.34.
