UK Headline Inflation Accelerated Slightly More than Expected

Markets

Markets were on an emotional rollercoaster yesterday. The first Ukrainian use of US-made long range ATACMS missiles pushed Russian President Putin into signing off a revised nuclear doctrine. It now includes a possibility of a nuclear response to aggression by non-nuclear states that are supported by other nuclear powers. European stocks lost around 1.5% and hit an intraday bottom (-2%) after Russian minister of foreign affairs Lavrov called it a “signal of escalation”. European stock markets eventually recovered to closing losses of somewhat less than 1% after that same minister tried to calm worries over a nuclear escalation. “We are strongly in favor of doing everything not to allow nuclear war to happen. A nuclear weapon is first and foremost a weapon to prevent any nuclear war.” Haven assets mirrored the intraday sell-off/recovery from equities. German yields ended around 3.5 bps lower across the curve but traded with losses of up to 10 bps. US yields lost up to 2.8 bps in a bull flattening move. EUR/USD closed unchanged just below 1.06, but set an intraday bottom around 1.0530. US stock markets turned starting losses into closing gains (S&P & Nasdaq), mainly thanks to a near 5% increase in Nvidia shares going into tonight earnings from the company. The outcome will influence general market/risk sentiment and could set the tone going into year-end.

EMU Q3 negotiated wage data are today’s economic highlight. Annualized wage growth remained between 4.3% and 4.7% from Q1 2023 to Q1 2024. Last quarter’s decline to 3.5% was welcomed by the ECB in its inflation fight, but remains way above the central bank’s 2% inflation target. ECB Lagarde indicated that forward-looking wage trackers point to a an easing of pay growth in 2025 which she hopes to see reflected in today’s numbers. While a further deceleration is likely, we don’t think they will give sufficient confidence for the ECB to accelerate from 25 bps rate cuts to a 50 bps move in December. It could extend the short term bottoming-out process in EUR rates given that EMU money market still attach a small probability to such a scenario.

UK headline inflation accelerated slightly more than expected in October, by 0.6% M/M to 2.3% Y/Y. Core CPI remained stronger as well, rising by 0.4% M/M to 3.3% Y/Y (from 3.2%). Services CPI ticked up from 4.9% Y/Y to 5%. Today’s figures add strength to the Bank of England’s “not too many, not too much” rhetoric. Sterling strengthens marginally in a first reaction, from EUR/GBP 0.8350 to 0.8330.

News & Views

Hungary’s central bank (MNB) kept the policy rate unchanged at 6.5% yesterday. One dissenter voted for a rate decrease, potentially inspired by disappointing Q3 growth and the recent sharper-than-expected inflation decline. The MNB noted that this indicates lower inflation in the short term. But the “exchange rate depreciation seen in the past months as well as changes to the system of excise duties are likely to have inflationary effects in the next year.” The Monetary Council said the increase in risk aversion towards emerging markets was driven by geopolitics and changing growth and central bank expectations of developed economies. The MNB said these developments pose an upside risk to domestic inflation and considered a pause in the cutting cycle appropriate. “Looking ahead, a careful and patient approach to monetary policy is still warranted.”, the statement still says. Its deputy governor in the press conference afterwards stressed the importance of anchoring inflation expectations, which for households are “significantly” above the central bank’s 3% target range. He stuck to earlier guidance of maintaining the current policy rate for a “sustained period”. The Hungarian forint ended yesterday lower against the euro. EUR/HUF closed at 408.3. Hungarian swap yields dropped some 5 bps across the curve, be it in a pre-meeting move.

Austria is expected to give Romania and Bulgaria full accession to Europe’s Schengen zone, the FT reported. Air and maritime checks were already abandoned since end-March but Austria insisted on land border controls because of concerns over irregular migration. It is now ready to drop its veto after Romania and Bulgaria increased security checks, resulting in lower asylum applications and irregular migration. Barring a change-of-mind of the Dutch government, which gave green light in 2023 but now has the far-right Freedom party in the coalition, the matter can be formalized at the next EU home affairs meeting Dec 12. All restrictions may then be lifted at the start of 2025.