Markets
Geopolitics rattled markets otherwise on track for an uninspired trading session. Russian president Putin signed off a revised nuclear doctrine, expanding the conditions for the use of atomic weapons. Russia could now retaliate in case of a (conventional) attack on its soil. Making good on the pledge made by Putin back in September, Russia will view aggression against itself or its allies by a non-nuclear state backed by a nuclear power as a joint attack. The revision doesn’t come out of the blue: it follows the outgoing US Biden administration giving Ukraine green light for the limited use of American-made long-range ATACMS missiles. This was in turn a response to North Korea’s agreement to deploy its forces in support of Russia and to increased Russian missile and drone attacks on Ukraine. Less than an hour after the updated doctrine, reports rolled in of Ukraine conducting such a first ATACMS strike. Russian minister of foreign affairs called it “a signal of escalation”. Risk-off rolled over markets. Both US Treasuries and German bunds rallied, the former outperforming. Both trade well off the intraday highs, though. US yields drop between 3.4-4.7 bps. German yields lose 2.5-3.4 bps across the curve compared to initial losses of <10 bps. European stocks take a 1.7% hit (EuroStoxx50) while Wall Street opens about 0.50% lower. The Japanese yen and Swiss franc take the lead on the G10 currency scoreboard. USD/JPY fills bids around 153.6. JPY gains against the euro are slightly bigger, bringing down the EUR/JPY pair to its 50dMA around 162.4. EUR/CHF came close to the 0.93 but without really testing the big figure. It is nevertheless on track for the lowest close since the August market meltdown. Natural gas prices (Dutch TTF) temporarily jumped to a new one-year high before easing a bit later in the session. Gold prices printed the first back-to-back rise since end-October. The precious metal is currently being sold for over $2635 per ounce. While geopolitics usually have a limited shelf-life, the topic may continue to draw market attention during the economic, political and monetary vacuum the coming days/weeks. Bank of England governor Bailey during his testimony before the UK parliament stuck to a “gradual” approach to rate cuts. Inflation returned faster than expected to target (temporarily though, red.) and there’s evidence of a loosening in the labor market, Bailey said. But he also saw risks of “lingering persistence” of wage pressures. The latter take center stage in Europe tomorrow, with the negotiated wage indicator (Q3) due. The Bundesbank already today disclosed German wages in Q3 having grown at the fastest pace in more than three decades (8.8%).
News & Views
The Riksbank’s first deputy Governor Anna Breman in a speech said that ‘inflation has fallen, and that conditions are good for inflation to remain close to the target even in the medium term.’ At the same time, Breman assesses that economic activity is not yet showing clear signs of strengthening. This combination justified accelerating the pace of rate cuts to 50 bps bringing the policy rate to 2.75%. On the recent inflation development (CPIF 1.5%; CPIF ex energy 2.1%) Breman said that “Energy prices are still contributing to CPIF inflation being below two per cent. At the same time, food prices have risen in in recent months. This is important to monitor, not least when a weak krona risks pushing up the price of imported food.” Still, Breman assesses that recent inflation data don’t change the view that inflation will remain low and stable in the medium term. If the outlook for inflation and activity remains the same, she sees the policy rate being cut further in December and during the first half of 2025. Markets currently more or less discount a 25 bps step in December and a policy rate being reduced to 2.0% by Q1 2025. The Swedish krone recently stabilized at weak levels (EUR/SEK 11.58).
Inflation in Canada in October rebounded more than expected. Headline CPI printed at 0.3% M/M and 2.0% Y/Y, to be compared to -0.4% M/M and 1.6% Y/Y in September, as gasoline prices fell less in October compared to September. CPI ex-gasoline was unchanged at 2.2%. Price of goods rose 0.1% Y/Y up from -1.0% Y/Y in September. On the other hand, services inflation decelerated to 3.6%, the smallest yearly rise since January 2022. The Bank of Canada’s preferred core measures increased to 2.5% (from 2.3%) and 2.6% from 2.4%. Markets reduced the chance of an additional 50 bps rate cut to about 30% from +40% at the start of the session. The BoC meets December 11. Gains of the Loonie against the US dollar look unconvincing. USD/CAD is hovering near the 1.40 barrier.
 attack on its soil. Making good on the pledge made by Putin back in September, Russia will view aggression against itself or its allies by a non-nuclear state backed by a nuclear power as a joint attack.){kind=link}