Sunset Market Commentary

Markets:

The market current is strong. Bearish sentiment on core bond markets is still name of the game with the long end of the curves underperforming as real rates push higher. It’s no different today with US yields adding another 0.5 bps (2-yr) to 6.5 bps (30-yr). Tenors of 5-y and more set fresh cycle tops. Atlanta Fed Bostic said that he’s not in a hurry to raise rates and not in a hurry to cut them. He just wants to hold them steady for a long time with policy automatically turning more restrictive as inflation comes down. Therefore, Bostic thinks that the US central bank can afford patience if inflation expectations remain steady. From a market point of view, it’s not about the finetuning of the Fed’s peak policy rate, but about the total period of time of peak rates. It’s the 5%+ message until end 2024 from the September meeting’s dot plot that ignited the latest sell-off bout with markets embracing the prospect of a higher neutral rate. The long end of the Germany yield curve follows the US with yields increased by 1.4 bps (10-yr) to 4.3 bps (30-yr). Front end yields are slightly lower (2-yr -2.6 bps). We didn’t see an immediate trigger and label early comments by ECB chief economist Lane as rather erring on the hawkish side. His base case is to maintain the current interest rate level for as long as needed while he downplayed the importance of the December 2023 policy meeting. He added a hawkish twist by saying that December isn’t the end of the inflation challenge, with March 2024 and even June 2024 seemingly “live” meetings as well. Lane believes that gas prices will go up from current levels, while oil prices already pose a problem. Energy is going to be a very important element to keep an eye on in coming months. Simultaneously wage increases are still quite high, leading Lane to conclude that there is still work to be done in terms of bringing inflation down. The dollar is the main beneficiary of the current market climate with the trade-weighted greenback setting a new YTD high at 107.22 and EUR/USD touching a fresh YTD low at 1.0460. USD/JPY clings in there at 149.91. Higher real rates pulled stock markets in a sell-on-upticks pattern with key European indices losing again up to and over 1%. Key US benchmarks opened with losses of about 0.5%.

News & Views:

The Turkish Statistical Office today reported September CPI inflation at 4.75% M/M and 61.53 Y/Y (from 9.9% M/M and 58.94% Y/Y in August). The Y/Y figure was the highest of the 2023 calendar year to be compared to a YTD low of 38,21% Y/Y in June. Core inflation (excluding unprocessed food, energy, beverages, tobacco and gold) also rose from 64.85% Y/Y to 68.93% Y/Y, even as the monthly pace of price growth slowed from 9.32% to 5.06%. Headline inflation was as expected, but core was above expectations. A sharp rise in education costs (30.27% M/M) caught the eye. Transportations costs added 4.35% in a monthly perspective. In a Y/Y perspective, food prices increased by 75.14 %, transportation by 76.06%, health by 78.79%, education by 80.96% and hotels, cafes and restaurants by 92.48%. The rather modest monthly price rises give some hope that inflationary dynamics might gradually slow, but the weak lira and higher oil prices pose upside risks. The CBRT its policy rate from 8.5% to 30% over the past months. Additional tightening is expected on October 26. The Turkish lira (USD/TRY 27.50) today touched a new all-time low.

Swiss inflation printed softer than expected in September. Headline inflation declined 0.1% from August causing a smaller than expected raise in the Y/Y measure from 1.6% to 1.7%. Core inflation declined a similar 0.1% M/M with the Y/Y price increase easing from 1.5% to 1.3%. According to the Swiss statistical office (FSO), the monthly decrease amongst others is due to lower prices for hotels and supplementary accommodation. Air fares and prices for domestic and international package holidays also fell. In contrast, prices for leisure-time courses, fuels and heating oil increased, as well as those for clothing and footwear. Services price decreased -0.3% M/M and were only 1.5% higher compared to the same month last year. Goods prices rose 0.2% M/M and 2% Y/Y. The Swiss national Bank left its policy rate unchanged at 1.75% two weeks ago, but kept the door open for some additional tightening as it expected inflation to return to the 2% ‘ceiling’ by the end of this year and to even slightly surpass the level in 2024. The jury is still out, but the September data, if confirmed, give the SNB some additional room to wait and see. The Swiss franc reversed yesterday’s strengthening, with EUR/CHF jumping from the 0.962 area to 0.967.