Markets
It was a slow start of the week. The eco calendar contained no meaningful data and with some event risk looming, including the US midterms tomorrow, investors chose the sidelines today. US yields at the front end recoup most of the 5-6 basis points it lost following Friday’s payrolls release while the longer end is trading virtually flat. We see a similar underperformance at the front in Germany with the 2y yield adding 4.5 bps vs losing up to 2 bps at the longest tenors. This slight flattening follows French ECB governor Villeroy in an interview with the Irish times saying the central bank should keep raising rates until underlying inflation (ex. energy and food) starts to ease. He expects headline inflation to ease somewhere in the first half of 2023. Villeroy said the current policy rate is not far from the neutral one, adding that the central bank could shift to a slower tightening pace beyond that level without giving an estimate for the so-called terminal rate. The UK gilt curve’s wings underperform the belly. Investors brace for four consecutive days of supply for the first time ever at a time the Bank of England is conducting longer-term bond sales from its portfolio (up to £750 million of 7-20y bonds today). Stocks catch a breather with the sharpest edges of the core bond yield surge blunted for the time being. The EuroStoxx50 trades with minor gains of about half a percent in lackluster trading. Wall Street opens 0.2% in the green, building only very modestly on Friday’s post-payrolls boost. Some in the market saw the first signs of the labour market having peaked, allowing the Fed to tone down its aggressive stance. We think that’s premature to conclude and Thursday’s US CPI reading may already serve as a reality check.
The currency market is trading similar to Friday with broad dollar weakness as the key feature. The greenback on a trade-weighted basis (DXY) loses first support at 110.78 (September interim high) and changes hands at 110.35 currently. EUR/USD surpasses 0.995 to test parity. USD/JPY edges further south to 146.18. Unlike what early morning trading suggested, sterling turned out to be one of the better performers in the G10 landscape. EUR/GBP pared gains to trade lower in the 0.871 area. GBP/USD is nearing the 1.15 handle.
News Headlines
The September Czech trade deficit narrowed from CZK 29.7 bln to 13.9 bln. The trade balance was still negatively impacted by a sharp rise in the deficit of crude oil and natural gas (CZK 10.9 bln shortfall) and to a lesser extent in ‘computer, electronic and optical products and pharmaceutical products’. This was counterbalanced by an improvement in the surplus of motor vehicles and electricity. The trade balance ended in the red for eight months in a row which last happened in February 2009. Other data showed a real rise in industrial production of 8.3% Y/Y, but a 0.2% monthly decline as the y/y rise mirrors last year’s steep decline in motor vehicle production. The value of new orders at current prices increased 21.9% Y/Y. The number of employees in industry decreased by 0.3% Y/Y. Their average gross monthly nominal wage increased 9.0% Y/Y. The data come as the Czech national Bank (CNB) paused its rate hike cycle at 7.0%.CNB governor Michl today said rates will have to stay relatively high for some time and that a cut cannot be expected yet. He also earmarked a reduction in the budget deficit as important to slow inflation.
The value of the Swiss National Bank’s foreign currency reserves at the end of October rose to CHF 817.16 bln from CHF 806.11 bln end September. However, the reason for the rise is difficult to pinpoint. The move probably is at least partially due to a decline in the value of the Swiss franc, raising the value of reserves assets denominated in foreign currency. At the same time, markets are still trying to find out whether the SNB at the same time intervened in the FX market to support the currency as it indicated it is prepared to intervene on both sides if necessary. After rebounding from a cycle low in the EUR/CHF 0.941 area late September, the CHF weakened to stabilize in the EUR/CHF 0.98/99 area over the previous two weeks.
