Markets
The ECB as expected paused the hiking cycle it started in July last year by leaving its deposit rate unchanged at 4% as recent information confirmed its assessment on the inflation outlook. Inflation is still seen staying too high for too long, but price rises dropped markedly. This was not only driven by base-effects but also by a slowdown in underlying inflation as previous hikes are affecting financial conditions. The MPC reiterates that ECB interest rates are at levels that, if maintained for sufficiently long, will make a substantial contribution to return inflation to 2% in a timely manner. The council maintains a data-dependent approach in determining the appropriate level and the duration of restriction. The ECB’s wait-and-see assessment was broadly as expected given recent growth and inflation data. The ECB kept ‘guidance’ unchanged that it intends to reinvest the proceeds of maturing assets from the PEPP program at least until the end of 2024. At the press conference ECB Chair Lagarde said that halting those reinvestments wasn’t discussed. This also applied for the renumeration of reserves. German yields opened higher at the start this morning, trading little changed at the time of the ECB decision. The intra-day ‘down move’ continued after the decision & during the press conference. German yields currently are ceding between 1.5 bps (30-y) and 4 bps (5-y). Lagarde indicated that any debate on the timing of rate cuts is totally premature.
The first estimate of US Q3 GDP printed at a strong 4.9% QoQa (from 2.1% and 4.5% expected). Private consumption (4%) and gross private investment (8.4%) were strong. As was government consumption (4.6%). Change in inventories also added 1.32% to overall growth. Net exports was marginally negative (-0.08% contribution). The price indicators were mixed (GDP price index 3.5% from 1.7%, core PCE deflator down to 2.4% from 3.7% Q/Q). Headline durable goods orders were very strong at 4.7%, but capital goods shipments stabilized. Weekly jobless claims rose marginally more than expected (210k) but remain low.US yields tentatively rose in the run-up to the data, but eased afterwards. Investors concluded that an important bout of strong data is now out of the way. US yields ease 3 bps (30-y) to 5 bps (5-y).
Other markets succeeded a modest risk-on rebound after the ECB decision and the US data. The EuroStoxx 50 reversed a 1%+ decline to currently lose only 0.35%. US indices opened with modest losses (S&P 500 -0.15%), but futures also showed bigger losses intraday. Modest moves also occurred in the major USD cross rates. EUR/USD touched the 1.0525 area but currently trades little changed at 1.056. USD/JPY after filling offers near 150.75 this morning eased back to 150.25. Sterling profited slightly from this afternoon’s risk rebound, with EUR/GBP easing back to the 0.871 area.
News & Views
The Turkish central bank (CBRT) raised its policy rate from 30% to 35% extending the stealth tightening cycle which started in the aftermath of Turkish elections in May (policy rate 8.5%). The strong course of domestic demand, the stickiness of services inflation, and the deterioration in inflation expectations continue to put upward pressure on inflation (61.53% Y/Y in September) . Upside risks stem from oil prices and the value of TRY. Monetary tightening will be further strengthened as much as needed in a timely and gradual manner until a significant improvement in inflation outlook is achieved. The CBRT also announced additional steps to increase the share of Turkish lira deposits and/or other liquidity-tightening measures suggesting that the pace of rate hikes will slow. EUR/TRY continues to trade near the all-time highs, just below 30.
Poland’s opposition leader Donald Tusk (Civic Platform party), who together with his allies secured a majority in Polish parliamentary elections earlier this month, suggested that gaining access to EU funds doesn’t depend on a lengthy legislative process. Improving relations with Europe is top of mind of likely future PM Tusk. Unblocking €35bn in EU funding could happen as soon as December if he’s able to form a government. The money was kept back on disputes with the outgoing Law & Justice party over rule of law infringements. EUR/PLN drops from 4.4825 towards 4.4575 today, but this is also might also be due to better risk sentiment intraday.
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