Sunset Market Commentary

Markets

The recent breathtaking rally in yields took a breather today. Investors adapting to central bankers’ ‘higher for (much) longer’ guidance via higher real yields hammered core bonds especially at longer tenors. Yields reached levels not seen since 2011 (Germany) or even 2007 (US 5 & 10-y). The US 10-y real yield settling well north of 2% also forced investors to a revaluate almost all assets, pushing US and EMU equity indices significantly below key support levels. The rise in real yields was the driver for other (FX and markets of riskier) assets and this process probably has further to go. However, sharp equity losses at some point might cause some investors to re-enter the market of (previously presumed) ‘safe haven’ bonds at a discount. At least today, bond markets found some short-term equilibrium with US yields easing 0.5 bps (5-y) to 3.0 bps (30-y). The 5.0 bps decline in the 2-y US yield was due to a benchmark change. US durable goods orders’ report (orders +0.2% vs -0.5% expected, shipments of capital goods non-defense ex aircraft +0.7%) was above consensus, but wasn’t able to revive the established trends. The German curve shows similar to the US (-2y -1.5 bp, 30-y -3.0 bps). 10-y intra-EMU spreads versus Germany also ‘stabilized’. The Italian spread ‘eased’ 2bps after a cumulative widening of about 20 bps over the previous week as markets await a (negative) government update on the 2023 and 2024 budget.

The limited easing on bond markets hardly supports equities for now (EuroStoxx 50 + 0.3%, S&P +0.35%). At the same time, Brent oil revisits recent peak levels (Brent $95.5 p/b) reinforcing a stagflationary mindset. Inflation data published tomorrow (Germany, Spain), and on Friday (EMU, US PCE deflators) will provide the next ‘hard’ reality check on recent markets’ trends.

On FX markets, softer yields and some calm returning to the equity markets hardly slowed the USD-uptrend. The DXY trade-weighted index gains further, admittedly at a more modest pace (106.35). USD/JPY touched a minor ST top at 149.25. EUR/USD at 1.0520 nears to 1.0516/1.0484 key support area. EUR/GBP (0.8683) for the fourth consecutive session tested the 0.87 range top. However, some UK specific news apparently is needed to force the break, especially with the euro also fighting an uphill battle.

News & Views

The KOF Swiss Economic Institute released its Autumn forecast today. This year’s growth forecast remains virtually unchanged at 0.8% (from 0.9% in June). Next year’s GDP prognosis was downwardly revised from 2.1% to 1.9% mainly because of the weaker performance of Switzerland’s trade balance (lower growth in goods exports). In a first forecast, 2025 growth is put at 1.6%. The KOF institute still projects Swiss inflation at 2.2% this year, but upped its call for next year from 1.5% to 2.1% before returning to 1.1% in 2025. The upward revision is due to a sharp rise in electricity prices at the beginning of the year and further rent increases. Inflation imported from abroad will play hardly any role at all. The Swiss National Bank is expected to keep its policy rate unchanged at 1.75% for some time with rate cuts only being implemented at the end of the forecasting horizon. The central bank will likely intervene by selling currency to ensure a strong CHF and further reduce imported inflation. KOF still expects the nominal effective exchange rate to appreciate. The Swiss franc corrected last week after the SNB kept its policy rate unchanged. It tries to take out the 0.97 big figure for the first time since early July (from low 0.95-area ahead of SNB). First resistance stands at 0.9738 (38% retracement on YTD decline).

The Czech National Bank unanimously decided to keep its policy rate unchanged at 7% today. The press conference with CNB governor Michl just started. He believes that inflation is still at unacceptably high levels, adding that the central bank board sees the future interest rate path above its July baseline in coming quarters. Czech rates increase at the front end of the curve as these early comments seem to suggest that the CNB is pushing back against November rate cut bets. EUR/CZK drops from 24.50 to 24.40.