Markets
At least for now, the US midterm elections didn’t provide an unequivocal driver for US/global markets. With several states still undecided, Republicans apparently are in pole position to take control of the House of Representatives while the Senate remains a close call. Even as Democrats performed better than expected, the Biden government probably will find it difficult to pass any high profile budgetary (or other) legislation. In theory, a ‘blockage’ of a stimulative fiscal policy, ceteris paribus, should help the Fed in its anti-inflationary campaign. However, bond markets don’t draw any firm conclusions yet. US yields basically maintain the post-Fed/post-payrolls holding pattern, gaining about 4 bps across the curve, which in hindsight of recent market moves only can be denominated as a very calm trading session. Eco data were few. Mortgage applications fell for the seventh consecutive week (-0.1%) but this evidently didn’t come as a surprise. Markets maintain a clear wait-and-see modus ahead of tomorrow’s key US inflation data. The US Treasury later today will sell $ 35 bln of 10-y Notes following yesterday’s successful 3-y sale. EMU/German bonds this time outperform US counterparts in bull flattening move with yields easing between 6 bps (2-y) and 1.5 bp (30-y). Especially short-term EMU/German yields over the previous days tested the cycle peak level, but for now there is no strong enough trigger to force a clean break higher. The EMU 2-y swap yield hovers near the 3.0% handle. The ECB today published its consumer inflation expectations (cf infra). The stalemate on the outcome of the US mid-term election for sure also didn’t inspire equity investors. The EuroStoxx 50 is ceding about 0.5%. US indices open with a loss of 0.75%/1.0%.
In the absence of any high profile news, USD-trading was confined by nearby technical boundaries. The USD DXY index yesterday extensively tested the 109.53 previous low/neckline, but for now the test is rejected (DXY 110.14). EUR/USD (1.0035) easily holds north of parity, but a (admittedly modest) negative turn in the interest rate differential apparently is enough to ‘protect’ the 1.0094/96 recent peak/resistance levels. Sterling lost yesterday’s positive spin. Markets apparently ‘fear’ that Fin. Min Hunt’s plans to restore fiscal orthodoxy might cause the BoE to give more weight on growth considerations. EUR/GBP currently again extensively test the 0.8781/91 resistance area. After a substantial rise in EUR/CHF in October and a subsequent consolidation later, a test of parity in this cross rate is still one bridge too far. The franc ‘strengthens’ to currently trade in the EUR/CHF 0.987 area.
News Headlines
Hungarian inflation rose by 2% M/M to be up 21.1% Y/Y (from 20.1% expected). Underlying core inflation accelerated from 20.7% Y/Y to 22.3% Y/Y. Processed food prices are still the main inflation driver, rising by 4.7% M/M. Way above average prices for tradable goods and market services show that inflation is broad-based though. Peak inflation is still to come near year end. Our own forecast (22%+) is slightly below what government officials indicated earlier this week (25%). It could take until Q2 2023 before we see <20% inflation readings, but afterwards we see a rapid dive below 10% in autumn 2023. The Hungarian central bank is expected to keep its very aggressive monetary policy stance to back the forint at least until there is an agreement with the EU on releasing Covid-relief funds. The forint didn’t respond to the inflation numbers. EUR/HUF currently trades around 404 after bouncing off the important 399/400 support area earlier this week.
The ECB in its economic bulletin took a deep dive into consumer’s inflation expectations. Consumers’ inflation expectations have reacted to higher inflation and heightened uncertainty, but the term structure of inflation expectations remains strongly downward sloping. In other words, consumers in the euro area continue to see that the current spike in perceived inflation has a significant transitory component and expect inflation to return closer to the levels seen in the past over the medium term, albeit above 2%. The upward movement in expectations, the increase in uncertainty surrounding them and the increased sensitivity of medium-term expectations to perceived current inflation all call for continued close monitoring though.
