Markets
UK CPI for the month October immediately set the tone for European dealings. Headline inflation accelerated from 3.1% y/y to 4.2% (1.1% m/m), faster than the 3.9% expected. Core inflation sprinted from 2.9% to 3.4%, another consensus beat. The price data comes after yesterday’s strong labour report. Both nudge the Bank of England towards a delayed rate hike in December. UK bond markets are still a bit hesitant with the short end of the curve edging >2 bps lower. Sterling on the other hand does enjoy a good bid. EUR/GBP eases towards the 0.84 support/big figure. A break lower in early European/late Asian dealings reversed but the couple clearly isn’t out of the woods yet, especially since the euro has nothing to offer in staging a countermove. ECB’s Schnabel serves as a point in case. The former-hawk reiterated the central should avoid a premature tightening, adding that conditions for a rate hike are very unlikely to be met in 2022. She implicitly refers to markets pricing a first rate somewhere end next year. Should sterling succeed in a technical breach sub 0.84, we’re looking at the 0.8282 March 2020 low as a next support. Friday’s retail sales could be the trigger needed. Cable extends yesterday’s trip back north of 1.34(7).
Other core bond markets and major currency pairs had a rather dull session. Both US and German yields are going nowhere. In FX, USD/JPY’s rally driven by yesterday’s strong retail sales ran into resistance at the 115 lever. The couple is filling bids at 114.71, marginally down from 114.82. The trade-weighted dollar (DXY) sought to escape the upward sloping trend channel through the upper bound but was forced to retrace its steps. It holds just south of 96. Parallel to DXY, EUR/USD rebounded from 1.129 support hit during the Asian session but the move clearly has no strong legs. The combo falls for a sixth working day straight and is currently struggling to retain the 1.13 big figure. Things look ugly for the euro. It can only hope the combination of the aforementioned dollar resistance levels (115 USD/JPY, 96 DXY, 1.129 EUR/USD) will hold for some short-term reprieve. More fundamentally, it’s the ECB that has to show signs of finally taking a policy U-turn.
News Headlines
Turkish president Erdogan did it again. On the eve of the next central bank meeting, he claims to lift the interest rate burden from citizens by repeating his unorthodox stance that high policy rates are the cause of rather than the cure to higher inflation. Ever since Kavcioglu heads the CRBT, the central bank already cut policy rates by a cumulative 300 bps. Kavcioglu is the fourth central bank governor since 2019 and clearly on the same line as Erdogan. The central bank U-turn comes at a price though, because the Turkish lira went into a fresh tail spin being deprived from zero/marginally positive real rates. EUR/TRY yesterday surged to a fresh all-time high above 11.50 and is currently attacking the 12 mark.
ECB vice president de Guinos presented the central bank’s biannual financial stability review. The recent economic recovery in the euro area brought a recovery in corporate activity that reduced risks related to economic scarring and rising credit risk. Pandemic-related risks haven’t disappeared entirely though, with inflation being a prominent one. In search of market vulnerabilities, de Guindos stresses the striking buoyancy for equity and risky assets, more novel and more exotic investments and rapidly expanding housing markets in absence of tightening lending standards. This FSR also zooms in on addressing some long-standing challenges which affect the strength of euro area banks. They examine the usability of capital within the regulatory buffer framework, consider how mergers and acquisitions could help the sector to return to more sustainable levels of profitability and explore approaches for managing non-performing loans, which can be a long-term drag on bank balance sheets.
