Markets
The ECB’s unanimous back-to-back rate cut brought the deposit rate to 3.25% today. This third rate reduction came earlier than analysts and the ECB itself expected in the days after the September 12 policy meeting. “The incoming information on inflation shows that the disinflationary process is well on track. The inflation outlook is also affected by recent downside surprises in indicators of economic activity”, the statement noted. The emphasized part is referring to the awful September PMI’s (Sep 23) that suggested the euro area economy had started to contract (composite 49.6). They were the sole reason for the U-turn first made by Lagarde before parliament (Sep 30) with other governors following suit in the days thereafter. According to the ECB president this is exactly what “data dependency” means. As she went into more detail she noted investment, consumption and exports are all still weak. That should pick up thanks to a boost in real incomes and looser monetary policy but risks to growth remain tilted to the downside for now. Inflation dropped to just 1.7% in September but is expected to edge higher again in coming months (base effects) and as domestic inflation remains high (wages rising at an elevated pace). Services inflation remains at an elevated 3.9% and prevents the ECB from formally declaring victory over the matter. Lagarde deep into the presser did say that risks to inflation are now more on the downside and not on the upside. Nevertheless, it sticks to a data-dependent and meeting-by-meeting approach. That was again obvious when asked if the ECB was now on track for cuts at every meeting. With amongst others two more PMIs, two more CPIs, Q3 GDP and wage growth data due ahead of the December meeting, investors better brace for some serious market volatility. European yields lose some ground today with front end (-2 to -3 bps) outperforming. Follow-up rate cuts are fully priced in for the next four upcoming meetings with the fifth for 85% discounted. The terminal rate stayed unchanged at <2%. That’s remarkable for an economy that according to the ECB is not headed for a recession but a soft landing. EUR/USD (1.082, from 1.086) declined but that was mainly the result of US data coming in on the strong side of expectations. In particular retail sales (0.4-0.7% depending on the gauge) were outright good with 10 out of the 13 categories rising with a drop in international oil market prices probably responsible for one of the three categories printing declines (gasoline stations -1.6% m/m). Weekly jobless claims eased from the sharp uptick last week to 260k from 241k vs 259k expected and the Philly Fed business outlook jumped from 1.7 to 10.3 compared to a way more moderate analyst consensus (3). Details were solid (expect for number of employees) and the six month ahead outlook rose to its highest level since July to hover around three-year highs.
News & Views
The Turkish central bank (CBRT) kept its policy rate unchanged at 50% for a seventh consecutive meeting today. The policy statement didn’t alter much from previous month. Taking into account the lagged effects of monetary tightening, the Committee will make its policy decisions so as to create the monetary and financial conditions necessary to ensure a decline in the underlying trend of inflation and to reach the 5% inflation target in the medium term. The decisiveness regarding tight monetary stance will bring down the underlying trend of monthly inflation (which slightly increased in September) through moderation in domestic demand, real appreciation in Turkish lira, and improvement in inflation expectations. The latter together with pricing behavior continue to pose upward risks. EUR/TRY continues to trade close to all-time highs around 37.20.
Hungarian central bank’s influential deputy governor Virag said that he’s ready to pause interest-rate cuts for an extended period, completing the U-turn following September guidance that a 25 bps rate cut is on the table at every remaining policy meeting this year. Earlier he already suggested a skip in October, now he implies skipping all together this year. “If the external environment and inflation outlook justify, the base rate may stay unchanged for a sustained period, raising our interest premium.” The MNB is obviously closely monitoring its currency and wants to avoid an unwarranted further weakening beyond EUR/HUF 400.
