Markets
Interest rate markets apparently still haven’t fully digested last week’s repositioning. Yesterday, US and EMU yields tried a cautious but unconvincing rebound off last week’s lows, but there was no follow-through action. Soon after the start in Europe, US and European bonds again captured a better bid and this was extended in US dealings. Financial news wires mentioned dovish MPC member Lael Brainard still being in the race to become the next Fed chair as possible support for bonds. The same applies to yesterday’s Fed financial stability report addressing a wide range of topics that might complicate the economic recovery. We doubt these factors were really of big importance. Markets simply remain uncertain on CB’s reaction function in a context of rising inflation but at the same time multiple risks to economic growth. The ongoing downleg on real yields is illustrative in this respect. German and US 10-y real yields are again close to the all-time lows (-2.21% and -1.17% respectively). The US real 30-y yield is currently in uncharted territory (-0.56%). On the more hawkish side of the CB spectrum, ECB’s Knot warned that the ECB shouldn’t make long-term commitments with inflation at risk of outpacing expectations. For markets this is still a minority view. Data were of second tier importance. German ZEW economic expectations unexpectedly rebounded from 22.3 to 31.7. Admittedly, the current situation index eased from 21.6 to 12.5, neutralizing any potential positive reaction. US October PPI inflation printed exactly in line expectations with the headline holding at 8.6% Y/Y. From a market point of view, the report didn’t bring the upward inflation surprise that is needed to change current dovish market thinking. The US yield curve flattens with the 2-y yield easing 3 bps and longer maturities declining about 4/5 bps. German yields also resume their (corrective?) decline with changes ranging between -1.7 bps (2-y) and -8 bps (30-y). Intra-EMU spreads again tighten, but only marginally with Greece slightly outperforming (-3 bps). ‘Depressed’ sentiment on yield markets currently has no big impact on equities. Persistent low real yields currently are enough to keep equity indices near recent (EMU)/all-time records (US).
On FX markets, the dollar remains in the defensive, but losses remain modest. The trade-weighted index (DXY) currently struggles to hold north of the 94 handle. EUR/USD locked is a balance of weaknesses (1.1595). The yen still outperforms on the further decline in core real yields. USD/JPY (112.90) confirms yesterday’s technical break lower. Sterling failed to hold on to tentative initial strength. EUR/GBP returned to the mid 0.8550 area. Lingering Brexit fears and an ‘unpredictable’ BoE interest policy currently hampers a sustained GBP-comeback.
News Headlines
The Romanian central bank increased policy rates with 25 bps to 1.75%. Although that was less than the 50 bps consensus, it follows the unexpected kick-off of a tightening cycle last month (from 1.25% to 1.5%). The central bank said its new forecasts showed a “more pronounced slowing” this year. This warrants a cautious tightening while it fights off soaring prices. Inflation sped up to 6.29% in September and will probably hit 7% when data for October is released tomorrow. That’s double the upper range of the 1.5-3.5% target. Complicating matters for the central bank is the political crisis after the government collapsed in October. Acting Defense Minister Ciuca officially returned his mandate to become the new PM just one week ago. The Romanian leu trades little changed near all-time lows of EUR/RON 4.95.
Hungarian inflation quickened more than expected (again) from 5.5% y/y to 6.5% (1.1% m/m). Core inflation also rose from 4.2% to 4.7%. Both gauges are now at levels not seen since 2012, adding more pressure to the MNB to step up the tightening pace. After three consecutive 30 bps hike, the MNB since September continued at monthly 15 bps rate hikes. While money markets have recently repositioned for a return of a more aggressive approach, the forint traded guarded. It left the 7-month lows against the euro from around EUR/HUF 365 end of October to a still weak near 361 today (almost unchanged vs. yesterday). The MNB holds its policy meeting next week.
