Markets
Investors are pondering the balance between inflation and its potential impact on growth. Admittedly, markets these days often see hard data a bit as outdated. Even so, with the EMU Q3 growth estimate and the October CPI, investors today received a high profile update on both variables. In the past, Europe often lacked strong (real as well as nominal) growth. At least for now is no big issue anymore. EMU Q3 GDP growth printed at 2.2% Q/Q and 3.7% Y/Y, slightly stronger than expected. Only few details on the composition are available. Austria (3.3% Q/Q), France (3.0%), Portugal (2.9%) and Italy (2.6%) outperformed. Still, inflation data grabbed most attention. EMU October inflation jumped 0.8% M/M to be up 4.1% y/y (from 3.4%). Energy prices evidently were a major driver, but core inflation (2.1% Y/Y) also surpassed the 2.0% barrier. ECB’s Lagarde yesterday reiterated that the conditions of the ECB’s forward guidance on inflation are not fulfilled. However, with this kind of data, the ECB’s assessment probably will be ever more difficult to explain both to citizens and markets. From a growth point view, the question also arises whether de EMU economy still needs current ultra-accommodative monetary policy. The BoE, the Bank of Canada and others recently concluded this isn’t the case anymore. EMU data seldom trigger abrupt moves, but yesterday’s post-ECB trends continue unabatedly. German/EMU yields recaptured the steep uptrend that was lost temporarily earlier this week. German yields rose between 1.4 bp (2-y) and 7.0 bp (10-y). The very long end again was the exception (30-y: -0.5 bp). The decomposition between real rates and inflation expectations was astonishing! The move is driven by an impressive rise in real yields. The 10-y EMU inflation swap nosedived 12 bp!!! This rise in real yields probably also explains the further widening in peripheral spreads. Greek and Italian 10-y spreads vs Germany widened 20 bps and 8 bps respectively. Such moves don’t make it easier for the ECB to maintain favourable financing conditions across the euro zone. Moves in US bond markets are similar, but a bit less outspoken with the 5-y yield rising 4 bp, the 10-y 2.5 bps and the 30-y easing 1 bp.
In FX, the USD outperforms. DXY rebound to the 93.70/75. The yen suffers from the rise in core real yields with USD/JPY returning close to the 114 handle. The euro fails to extend yesterday’s rebound. A mild risk off and maybe the widening of intra-EMU spreads maybe spoiled yesterday’s improved sentiment on the single currency. In this context, we also mention persistent gains in the Swiss franc. The franc apparently still has a safe have role to play as intra-EMU spreads widen.
News Headlines
Czech GDP grew 1.4% q/q in Q3. That’s faster than in Q2 (1% q/q) but slower than expected (1.8% q/q). Compared with the same period one year ago, GDP has risen 2.8% (3.2% expected). The Czech Statistical Office (CZSO) reported a positive contribution from domestic demand, both from household consumption and gross capital formation. It noted government consumption rose too but exports decreased. A drop in external demand has influenced GDP growth negatively “in a considerable way”. Sectorwise, CZSO saw the gross value added coming from trade, transportation, accommodation and food service activities while manufacturing (probably the result of shortages and supply bottlenecks) negatively impacted GVA. The Czech krone strengthened marginally to EUR/CZK 25.67.
Polish inflation rose at the fastest pace in two decades in October. Headline inflation jumped from 5.9% y/y to 6.8% due to strong monthly dynamics of 1% m/m. Both exceeded market expectations of 6.4% and 0.6% m/m. Especially energy costs (10.2% y/y) and fuel (33.9% y/y) were heavily contributing. Price pressures are now so high and above the National Bank of Poland’s 2.5% (+/-1 ppt) target, that another rate hike at next week’s policy meeting seems inevitable even though Glapinski played down the prospect of a tightening cycle after the NBP’s unexpected 40 bps rate hike last earlier this month. The jury’s still out whether it will be a 25 or 50 bps increase. The Polish zloty is hesitating to frontrun the very dovish Polish MPC. EUR/PLN eases only slightly to 4.62.
