Markets
Markets initially followed a similar scenario yesterday. Even as there was little in the way of hard economic news, US and EMU yields tried a next step north. However, this time the move had less momentum. Remarkably, US yields were the first to run into resistance and currently ease between 1 bp (2-y) and 3.3 bps (30-y). Yesterday’s rise in yields probably was mainly driven by growing market concern on fiscal sustainability, especially in case of a Trump victory. At the same time, the Fed is also becoming more sensitive/vocal on the impact of a too loose fiscal stance for its own policy. It should make the Fed more cautious on returning to a neutral level which by the way could be higher than expected. Technical considerations are also in play. The 4.1%-area markets the mid-August/October top for the 2y yield (currently 4.03%). The US 10y yield struggles to hold above 4.17% (50% retracement April/September decline). The German yield curve steepens further (2y -3 bps; 30y + 2 bps). German Bunds continue to underperform against the euro swap curve. This trend isn’t new, but might be an indication of investors looking for a higher fiscal risk premium even on core bonds. The rise in ‘bond’-premia for now only had limited impact on (other) risk assets. Damage on equity markets remains modest (Eurostoxx 50 -0.1%; S&P -0.5%). Oil tries to build a bottoming out process after last week’s setback (Brent currently $74.9/b).
Today’s pause in the (US) yield rally didn’t change fortunes for the dollar. DYX continues its attack on the 104 barrier. After a brief intraday up-tick, EUR/USD relapsed to the 1.081 area. A return to 1.0778 support looks ever more likely. Sterling is also losing some further momentum. UK September government budget data highlighted the fiscal challenge Chancellor Reeves’ budget faces next week. At £16.6bn, PSNB borrowing was marginally lower than expected, but still very high by historical standards. Net borrowing in the April-September period (£79.6bn) was £6.7bn above the March OBR forecast. Government debt-to-GDP remains just below 100% (98.5%). Whatever the reason, EUR/GBP tries to leave the 0.83 support area (currently 0.8345) and this is unlikely due to euro strength.
News & Views
The National Bank of Belgium’s consumer confidence indicator rose slightly in October, from -7 to -5. That brings it back above its long-term average though that doesn’t say a lot. The NBB pointed out that confidence has been oscillating around its historical average since June last year, implying there’s no actual trend developing. That said, the increase in confidence was reflected in all but one component. Households plan to save more and anticipate a strong improvement in their financial situation. The latter rose to the best level in over a year. After worsening last month, consumers were more optimistic again about how they foresee the labour market developing in the next twelve months even though they haven’t changed their assessment on the general economic situation.
The Hungarian central bank (MNB) kept the policy rate unchanged at 6.5%. The second skip this cycle (previously in August) was widely expected after the central bank’s vice-governor Virag last week flagged the possibility of an extended pause. His comments came after the forint since early October was pressured above the psychologically important EUR/HUF 400 barrier again. The central bank noted that “intensification of geopolitical conflicts has led to rises in energy prices and emerging market risk premia” while observing that the external interest rate environment (read: the Fed) may ease more slowly than previously expected. While inflation has more or less evolved in line with the September outlook – with headline expected to rise to 4% by year’s end, core inflation around 5% – the recent developments have increased upside risks. “In the Council’s assessment, re-intensifying geopolitical tensions, volatile financial market developments and the risks to the outlook for inflation warrant a pause in cutting interest rates.” The Hungarian forint’s intraday recovery below EUR/HUF 400 lacked conviction, allowing the pair to return to 400.7 currently. Hungarian swap yields pared an earlier rise with the curve now showing net daily changes between -1.7 and -4 bps. Money markets expectations for the central bank barely changed.
 and 3.3 bps (30-y). Yesterday’s rise in yields probably was mainly driven by growing market concern on fiscal sustainability, especially in case of a Trump victory.){kind=link}