Markets
A standstill on FX markets, minor gains on stock markets and technical corrective action on the European bond markets wraps up today’s action. The eco calendar was empty apart from final EMU PMI’s, leaving a void between yesterday’s good US manufacturing ISM (60.8 from 61.1) and tomorrow’s ADP employment, non-manufacturing ISM and Fed meeting. With the latter, we arrived at today’s main reason for inaction. Investors won’t put up any additional directional bets until that elephant leaves the room. Fed Chair Powell will give the final go-ahead to tapering asset purchases, but the pace and timing have already been well-flagged. Asset purchases will be reduced by $15bn on a monthly basis ($10bn Treasuries & $5bn MBS) to grind to a halt by June next year. The absence of new growth and inflation forecasts and an updated dot plot leaves investors guessing on the timing of a first rate hike. Fed chair Powell won’t commit himself to addressing this thorny issue. The September SEP showed Fed governors split on starting the hiking cycle already next year. Money markets are already positioned more aggressively. The policy statement will be the only potential tell on whether governors are reassessing the nature of the inflation spike. The official narrative so far reads that elevated inflation largely reflects transitory factors. Watering down “largely” or leaving behind the transitory reference all together, won’t go unnoticed.
In summing up today’s action, we’ll start with European bond markets. The German 10-yr yield and European 10y swap rate failed to pierce YTD highs at -0.07% and +0.3% respectively in the wake of last week’s ECB action, causing return action. German yields lose 5.1 bps to 7 bps in the 2y-10y segment with the very long end underperforming (flat). Trading at the very long end of yield curves remains very peculiar and often inexplicable over the past months. Underlying details show a setback in last week’s sudden jump in real rates. The US yield curve bull steepens with yield changes ranging between -3.2 bps (2-yr) and 0.1 bp (30-yr) as the December 15 policy meeting is the likelier occasion to give new guidance on rate normalization. The FX market is an ocean of calm with EUR/USD switching sides around the 1.16 big figure. EUR/GBP shows a similar choppy trading pattern around the 0.85 handle with investors anxiously awaiting Thursday’s verdict by the BoE. Markets and analysts are split on whether or not the BoE will hike its policy rate.
News Headlines
The next Czech government is unlikely to adopt the euro during its four-year term, Stanjura, the man tipped to be the finance minister in the new centre-right coalition, said today. All five parties that form the coalition are generally pro the introduction of the euro but made clear it was not high on the agenda. Instead they will focus on bringing public finances in order after the ravage of the pandemic. Stanjura added that the long-time position was and still is that the Czech Republic should only adopt the euro when it is in their favour, which hasn’t been the case so far. The new Czech coalition seeks to have the government agenda and ministerial jobs distribution ready by November 8, when the fresh lower house of parliament meets for the first time.
Swiss inflation accelerated more than expected in October, from 0.8% y/y to 1.3%. It’s the fastest pace since 2010, matching the speed in 2018. Core inflation stayed muted at 0.6%. The Swiss statistical office said heating oil, gas and fuel recorded a price increase whereas prices for salads and fruiting vegetables decreased. The quickening price evolutions are unlikely to worry the SNB as (core) inflation is still far away from the 2% target. The notoriously strong Swiss franc also serves as an anti-inflationary factor. EUR/CHF recently slipped below 1.06 and neared levels seen at the height of the pandemic. The currency pair today tries to recover some of the lost ground.
