Markets
You could’ve more or less skipped three quarters of today’s European session. Not even consensus-beating Spanish and German CPI managed to cause a wrinkle worth mentioning. The sidelines were crammed with investors awaiting the ECB policy meeting. As expected, not a lot changed, if not nothing. The ECB keeps the main policy rate at -0.5%, continues buying under APP at €20bn/m and sticks to buying under PEPP at a moderately lower pace to keep financing conditions favourable enough. The ECB remains confident of solid economic growth although momentum has moderated and the outlook gets cloudier as high (energy) prices may weigh on consumer demand and material and labour shortages hamper production. It is equally confident of its analysis that inflation is still temporary. Lagarde said they have discussed the topic extensively (talked about “inflation, inflation and inflation”) but in the end stuck to the view that energy, rising demand and supply bottlenecks are fueling prices these days and should ease in the course of next year. Markets disagree and have sent inflation expectations to multiyear highs over the course of the month while also starting to price in rate hikes (end 2022). On the latter, Lagarde echoed chief economist Lane, saying they are not in line with forward guidance – although she didn’t want to say markets were getting ahead of themselves either. All in all, the ECB did a poor job convincing markets of a view that increasingly isolates the central bank from most of its colleagues in advanced economies. “Temporary but for a little longer” doesn’t cut it anymore. Investors assume that the longer the ECB ignores what’s in plain sight, the harder it’ll have to react eventually. Hence today’s market reaction. German yields soared across the spectrum with yields as much as 6bps+ higher at some point before halving in early and typically volatile US dealings. Peripheral spreads widen up to 8 bps in Italy. US yields were caught in the slipstream but pared gains afterwards in lockstep with Germany. Changes vary from 1.8 bps (2y) to 3 bps (5y) over 0.8 bps (10y). US GDP disappointed slightly but that was already before yield’s momentum faded. Q3 GDP growth eased from 6.7% q/q (annualized) to 2% (vs 2.6% expected). Personal consumption accounted for half of the economic growth. Gross investments added 2% but exclusively on the back of inventories while net exports (-1%) weighed on growth. EUR/USD enjoys the rate support and bounces from sub 1.16 to 1.1636 currently.
News Headlines
The Swedish Statistical office reported that Sweden’s GDP growth rose 1.8% Q/Q, bringing activity in the economy to 4.7% y/y. Yesterday, the Budget office already highlighted the positive impact of strong growth on Sweden’s deficit and government debt metrices. The positive news flow recently translated in a rise of MM rates and rates in short-term government bonds. The Sept/Dec 3M FRA today jumped 10 bps to 0.305%. The krone maintains recent gains and is holding below the psychological barrier of EUR/SEK 10.00 (currently 9.9675).
The CBRT in its new inflation report expects inflation to be at 18.4% at the end of the year compared to 14.1% earlier. It also raised the 2022 forecast (from 7.8% to 11.8%) and 2023 (7.0% from 5.0%). Governor Kavcioglu repeated the CBTR’s view that some of the factors causing inflation to rise, including food and import prices and supply-side disruptions, are expected to ease in the near future. Next Turkish inflation data will be published on November 3. The lira again traded in the defensive today, with EUR/TYR rising to 11.17.
Preliminary Belgian Q3 GDP rose 1.8% Q/Q resulting in a 4.7% Y/Y growth, the National Bank of Belgium published today. Activity now exceeds the pre-corona level. Value added declined 0.1 % from the previous quarter in industry and was down 0.5 % in construction. Value added was up by 2.3 % in services. The Belgian statistics office reported Belgian inflation in October to have accelerated 1.47% M/M and 4.16 Y/Y. The latter was the highest reading since October 2008. Core inflation rose from 1.61% to 1.95%. The most significant price increases were registered in natural gas, electricity, motor fuels, heating oil, restaurants and cafés and the purchase of vehicles.
