Markets
The German Bund opened stronger this morning both catching up with US Treasury gains and reacting to Italian political news. The US story originated from yesterday’s FOMC meeting and the buy-the-rumor, sell-the-fact reaction in the US Note future. Local newspaper Corriere dela Serra delivered the Italian spin by suggesting that the rumored 1.9% of GDP deficit agreement for next year was at stake. Lega supposedly joined 5SM last-minute call for more fiscal leeway (2.4% of GDP). Political parties face a midnight deadline. BTP’s underperformed mainly at the start of trading, but failed to really recover intraday. The German Bund topped off after German regional inflation data rolled out. They all suggested a faster rise than anticipated CPI on a country level. This was eventually confirmed (0.4% M/M, 2.2% Y/Y vs 0.1% M/M, 1.9% Y/Y). The echo of ECB Draghi’s words earlier this week resonated through investors’ minds. “We see a vigorous pick-up in core inflation”. The German 10-yr yield gradually returned above the 0.50% mark. Other eco data – EMU EC confidence, M3 money supply and US durable goods orders – disappointed, but couldn’t turn the tide. German yields changes (compared to yesterday official close) range between +0.2 bps (5-yr) and -2.7 bps (30-yr). US yields add 1.4 bps to 1.7 bps across the curve. 10-yr yield spread changes vs Germany are nearly unchanged with Italy underperforming (+5 bps).
Yesterday, the dollar reacted in a guarded way to the Fed policy decision/policy guidance. The Fed confirmed the positive economic assessment from August. The interest rate dots were also little changed. The market still takes a softer view than the Fed dots and yesterday’s Fed communication was not able to narrow this gap, resulting in yet another indecisive reaction of the dollar. This morning, renewed uncertainty on the outcome of the Italian budget negotiations, hammered EUR/USD to the 1.17 area. German September CPI’s printed much higher than expected but didn’t help the euro. In the afternoon, USD strength resurfaced despite mixed US eco data (sharp widening in trade deficit, strong inventory data, mixed durable orders) and as risk sentiment improved. EUR/USD trades currently in the 1.1680 area. USD/JPY also reversed early session softness and is again testing the 113 area. Some euro softness is in play, but it also looks that the dollar maintains the benefit of the doubt post-Fed.
Trading in EUR/GBP and cable was mainly driven by the euro and the USD side of the story rather by GBP-related news. EUR/GBP dropped below the 0.89 mark, amongst others, due to uncertainty on the Italian budget. The overall decline EUR/USD spilled over to EUR/GBP. At the same time, cable (1.3130 area) ceded ground as the dollar gained across the board. As usual, there were again plenty of Brexit related headlines, but we doubt they were an important factor in today’s GBP-price action. Regarding monetary policy, we mention a hawkish tone in a speech of BoE Chief Economist Haldane as he indicated that more UK interest rate hikes are needed.
News Headlines
After rumors this morning that today’s cabinet meeting on the Italian budget could be postponed, PM Conte’s office confirms the cabinet will meet tonight at 8pm. In the meantime, Italy’s Deputy PM Salvini repeated that Italy should have a deficit above 2% of GDP so campaign promises can create jobs and spur growth.
ECB president Draghi’s words on a ‘vigorous’ pick-up in underlying inflation aren’t cold yet and German inflation unexpectedly accelerated to a four-month high. Consumer prices rose 2.2% (YoY) in September, beating the 1.9% market expectation. The monthly inflation number prints 0.4%, while only 0.1% was expected.
The US merchandise trade deficit unexpectedly grew to $75.8bn in August, from a $72.0 billion deficit in the month before, while inventories at wholesalers and retailers increased. The trade gap in goods was, however, estimated to decline to $70.6bn. Imports rose 0.7% in Augustus, while exports fell 1.6%.
