Markets
UK labour market data this morning marked the start for a new downleg in EUR/GBP. The pair fell further from 0.8480 to 0.8440. First support stands at 0.8403 which is the October and YTD low. The UK yield curve bear flattened with yields rising by 2.5 bps at the front end and nearly unchanged to slightly lower at the very long end of the curve. The UK economy added 247k jobs in the third quarter compared to 190k consensus. The 14.9k decline in jobless claims in October bodes well for the start of Q4 2021. Filtering the data since the end of the pandemic-related furlough scheme, the net job growth increased by 160k. That’s a very important signal to markets since BoE Bailey circled the September and October labour market reports as being decisive for the December rate hike call. His unease about inflation levels is well-known, but the BoE governor (and his colleagues) wanted that final piece of evidence from the labour market before pushing through with 15 bps rate hike to 0.25%. Today’s numbers work comforting in this respect. Tomorrow’s UK October CPI data can provide the UK currency with another boost in case we see the dominating upward inflation surprise of past months. Consensus expects an acceleration in both headline and core outcomes, respectively from 3.1% Y/Y to 3.9% Y/Y and from 2.9% Y/Y to 3.1% Y/Y.
EUR/USD suffered a fresh spike lower as well. The pair currently changes hands near 1.1330 with key support at 1.1290 already lining up. New dollar strength was the result of a stronger than expected October US retail sales report. Both headline (1.7% M/M) and core sales (1.4% M/M) beat consensus. The consumption-proxy in calculating GDP rose by 1.6% M/M. Markets easily put aside the fact that retail sales are a nominal series. The trade-weighted dollar has the 96 big figure within reach coming from 94 ahead of last week’s US CPI. USD/JPY is about to test the 114.70 recovery high. US Treasuries underperformed German Bunds in the wake of the data. US yield changes vary between -0.4 bps (30-yr) and +1.2 bps (2-yr). The German yield curve steepens with yield differences ranging from -4.2 bps (2-yr) to +1.5 bps (30-yr).
News Headlines
After slowing rate hikes to 15 bps in September and October, the National Bank of Hungary today again accelerated to pace of tightening, raising the policy rate from 1.8% to 2.1%. According to vice governor Virag, the country is entering a new phase in its tightening cycle. The NBH sees a more extensive and longer rate hike cycle needed with further monthly rate hikes to follow as inflation might surpass 7% in November. The NBH also stops providing HUF liquidity via FX swaps. EUR/HUF currently trades near 364, overcoming early weakness after the policy statement.
The German energy regulator announced that it has temporarily suspended the certification of the Nord Stream 2 pipeline. The Swiss based consortium behind Nord Stream 2 needs to form a company under German law to get an operating license. The approval of the Nord Stream 2 project is a highly sensitive political issue. Russia wants to supply gas to Europe via a network that doesn’t transit Ukraine. However, several western countries are objecting bypassing gas supply from Ukraine. At the same time, markets see a risk for Russia to keep gas supplies to Europe tight as long as Nord Stream 2 isn’t approved. European gas prices rose more than 10% today.
October Polish core inflation rose in line with consensus by 4.5 Y/Y (from 4.2% Y/Y). Headline inflation was yesterday confirmed at 1.1% m/m and 6.8% Y/Y. Persistently high inflation is fueling the debate on the pace of further interest rate hikes at the NBP’s next policy meetings. Governor Glapinski doesn’t see current level of the zloty as raising pressure on the central bank to hike rates as it supports growth. Other MPC members feel less comfortable with current inflation and the weak currency. Policy maker Zubelewicz deems a policy rate of 3% as appropriate. The zloty remains under pressure with EUR/PLN touching 4.66, near the historic PLN low of 4.68.
