Sunset Market Commentary

Markets

UK Gilts outperform German Bunds and US Treasuries today in the wake of an incomplete labour market update. Today’s willingness to react says more about UK/BoE sentiment rather than about the actual data. Wages (ex-bonus) grew bang in line with expectations (7.8% y/y in the three months through August) while early September employment growth missed expectations by the smallest of margins (-11k vs +3k expected with a 7k downward revision to the August number). Daily changes on the UK yield curve range between -1 bp (2-yr) and +5 bps (30-yr). Sterling underperforms with EUR/GBP rising from 0.8640 to 0.8680 and closing in on the key 0.87 resistance area (July & September highs and 200d moving average). Today’s move suggests that anything bar a significant upward surprise in tomorrow’s CPI inflation figures could be sufficient to trigger a test and even a break above this technical resistance given the Bank of England’s tendency to err on the dovish side of the aisle. And if tomorrow’s inflation figures don’t do the trick, there’s still UK retail sales on Friday and the remainder of the labour market update next Tuesday. The BoE meets next on Nov. 2, when it has a new Monetary Policy Report at its disposal.

US Treasuries underperform following in the release of strong(er than expected) September US retail sales. The topline number rose by 0.7% M/M with the August reading being upwardly revised from 0.6% to 0.8%. The retail sales control group – proxy for consumption in GDP calculations and excluding food services, auto dealers, building materials stores and gasoline stations– surged by 0.6% M/M (vs 0.1% expected) and the August figure up at 0.2% from 0.1%. Strong retail sales add to the picture of resilient demand, a tight labour market (consensus-smashing September payrolls) and a disinflationary process proceeding as projected. Just looking at the numbers suggests that the Fed will conduct its final promised rate hike for this year at the November 1 meeting. Blurring this picture are comments that the recent (long term) yield increase substitutes for such a rate hike via tighter financial conditions. The jury remains out even as markets only attach around 10% probability to a November move. This chance rises to 50% by the first policy meeting of next year. Anyway, US yields were already on the rise and received an extra push in the back. They currently add 8.0 bps (2-yr) to 13 bps (10-yr). EUR/USD made an intra-day U-turn giving up small earlier gains to return to the 1.0550 area. The accelerating core bond sell-off leaves its traces on equity markets again, putting all hopes from the high-stakes Biden visit to Israel back to bed. Key European benchmarks suffer losses to the tune of 0.5%-1% with main US indices opening with a similar loss (S&P 500 0.7%, Nasdaq -1.1%).

News & Views

The BoJ is likely to discuss raising its inflation forecasts for the 2023 and 2024 fiscal years at its Oct 31 meeting. News company Bloomberg ran the story citing people familiar with the matter. The BoJ’s preferred gauge (CPI excluding fresh food) is seen closer to 3% for the current fiscal year (through March next year) then the 2.5% projected in July. For FY 2024 starting in April, the officials said the indicator could be adjusted to 2% or more vs 1.9% currently in the books. If that’s the case, it would mean the BoJ is expecting inflation at or above 2% for three consecutive years. But yen bulls better hold their horses still. The people said the 2025 FY forecast would probably remain unchanged around 1.6%, meaning the 2% target wouldn’t be hit sustainably just yet. The BoJ repeatedly tied this to wage growth increasing. USD/JPY briefly slipped to an intraday low of 148.84 before quickly paring losses again. The pair (149.75) is currently still flirting with the symbolically important 150 barrier.

Canadian prices unexpectedly decreased in September. Monthly inflation came in at -0.1%, down from 0.4% in August The yearly figure as a result fell from 4% to 3.8%. Core gauges also showed improvements, with the trimmed CPI easing more than expected from 3.9% to 3.7% and the median indicator dropping from 4.1% to 3.8%. The monthly slowdown was mainly driven by lower m/m prices for gasoline (-1.3%). Shelter eased from 0.8% to 0.5% and food prices for a second month straight dropped by 0.1%. In sector terms, prices of goods fell for the first time since December 2022 (-0.3%) while those for services flatlined. Today’s numbers offer some relief to the BoC. Markets scaled down bets for a 25 bps rate hike (to 5.25%) from 43% yesterday to 20%. USD/CAD rallies from 1.36 to 1.369.