Markets
Today started somewhat as expected. French and Spanish September CPI data printed below consensus. French prices fell by 1.2% M/M to 1.5% Y/Y (from 2.2%), the first sub-2% reading since July 2021. Significantly lower fuel prices, but also lower services costs (turnaround after Olympics) drove the move. Spanish inflation was 0.1% M/M lower with only the second below 2% Y/Y-reading since March 2021 (1.7% from 2.4%). Core CPI slowed as well (2.4% from 2.7%) whereas markets expected a stabilization. Fuel prices were again the main culprit. EMU money markets nevertheless added to October ECB rate cut bets in the wake of the release. Their reasoning is simple: the only two key data points in the brief intermeeting period both surprised on the downside (PMI’s and now CPI’s). While markets currently attach an 80% probability to a follow-up rate cut, we still err on the side of the status quo. Recall ECB President Lagarde’s Q&A after the September meeting: “We are looking at a whole battery of indicators. And I’m saying that in particular because September will certainly deliver a low reading of inflation. Very likely. We expect, because of the base effect, particularly on energy, our inflation numbers to be up in the fourth quarter, so the last three months of 2024. But September is going to deliver a low reading.” In our interpretation, Lagarde basically hedged the September CPI figures with the central bank wanting more input on services and especially wages going into their final meeting this year. The ECB president can on Monday settle the debate when she appears in front of EU parliament. German yields lose 4 to 5 bps across the curve today. The euro initially dipped from levels near EUR/USD 1.1170 to 1.1130. The move was erased by the time of the release of US eco figures with bullish risk sentiment helping out. Key European stock markets add another 1% today. Disappointing US personal income/spending data (both +0.2% M/M in September) and a marginally lower core PCE deflator (0.1% M/M vs 0.2%) equally convinced (US) money markets to add to 50 bps Fed rate cut bets in November, our preferred scenario. Going into next week’s key eco data (ISM’s, payrolls) and Powell speech, the odds are perfectly in balance between 25 bps and 50 bps. US yields lose around 3 bps after the release, propelling EUR/USD back to first resistance at 1.1202/14. We stick to our sell USD on upticks approach. The trade-weighted dollar already set a minor new sell-off low at 100.16 with the 2023 low at 99.58 being the next target. USD/JPY’s drop from an intraday high of 146.20 to currently 142.70 helps explaining. JPY rebounded after results of the LDP leadership contest which was lost by a dovish BoJ advocate (Takaichi) in favour of Ishiba.
News & Views
Belgian inflation fell by 0.5% M/M in September to 3.06% Y/Y (from 0.0% M/M and 2.86% Y/Y) in August. Core inflation (ex-energy products and unprocessed food) was little changed at 2.80% from 2.78%. Energy inflation was an important factor at 6.72% Y/Y, compared to 6.96% last month and 14.01% in July. Electricity prices rose 14.8% Y/Y from 11.3%. For natural gas, it went from 103.0% last month to 138.1% this month. The increase is the result of the extinction of the impact of the basic package for electricity and natural gas. The disappearance of the package will have an increasing effect on inflation until February 2025. Services inflation is stable at 4.04%. Inflation for rents also remains stable at 4.74%. Inflation for food products (including alcoholic beverages) stands at 1.08% compared to 0.04% last month. Main monthly price increases concerned electricity (4.4%), natural gas (4.5%), travels abroad and city trips (2.6%), clothing (0.6%) and tobacco (3.9%. Plane tickets (-17.7%), motor fuels (-3.8%), hotel rooms (-10.0%), domestic heating oil (-2.9%), domestic trips (-9.9%), non-alcoholic beverages (-2.0%), alcoholic beverages (-1.8%), cleaning and maintenance products (-5.7%), confectionery (-2.0%) and meat (-0.8%) decreased. The estimate according to the European harmonised index (HICP flash estimate) amounts to 4.5% in September 2024.
The Brazilian unemployment rate unexpectedly declined from 6.8% to 6.6% in August. The consensus only expected a decline to 6.7%. The level is the lowest since current methodology which goes back to 2012. The strong labour market data come as Brazil’s central bank last week raised its policy rate by 25 bps to 10.75%, as its concerned about the inflationary impact of ongoing stronger than expected growth and a tight labour market. The BCB this week also already raised this year’s growth forecast (3.2% from 2.3%) and the inflation forecast over the period 2024-2026 to 4.3%-3.7%-3.3% from 4%-3.4%-3.2%. The real trades little changed near USD/BRL 5.44.
Graphs
USD/JPY: yen rebounds after outcome LDP leadership contest. Dovish BoJ advocate lost run-off.
EU 2y swap rate: markets add to October ECB rate cut bets, pulling the front end of the curve to lowest levels since 2022
German Dax: German stocks are today’s outperforms as industrial stocks make comeback
Gold extends rally as investors pile up on easing bets
, the first sub-2% reading since July 2021. Significantly lower fuel prices, but also lower services costs (turnaround after Olympics) drove the move. Spanish inflation was 0.1% M/M lower with only the second below 2% Y/Y-reading since March 2021 (1.7% from 2.4%). Core CPI slowed as well (2.4% from 2.7%) whereas markets expected a stabilization.){kind=link}