Markets
“Overall borrowing between 2024-25 and 2028-29 is higher than the March forecast by £142.2 billion, an average of £28.4 billion a year. This represents one of the largest fiscal loosenings of any fiscal event in recent decades.” It’s the UK Office for Budget Responsibility’s summary of Chancellor Reeves autumn Budget yesterday. UK gilts initially stomached the Budget extremely well, with the lack of Truss/Kwarteng-like surprises causing yield drops of >10 bps across the curve compared to Tuesday’s close. Things took a turn after the OBR dropped its analysis with a massive >20 bps comeback from the intraday lows. Yields eventually closed 4.1 (30-yr) to 6 bps (2-yr) higher. Markets trimmed bets for BoE easing to <100 bps of cuts in the year ahead. EUR/GBP rebounded from the low 0.83 to 0.8375 amid significant Bund underperformance. Yields rose +/-12 bps at the front in the wake of (much) higher-than-expected European growth and inflation reaccelerating quicker than anticipated. Readings from several national member states yesterday suggest a faster return of the European figure back above 2% from the 1.7% currently. Risks to analysts’ estimate of 1.9% for the October outcome released later today are clearly skewed to the upside. US yields rose up to 8.5-9.4 bps (2-yr, 3-yr) on a consensus-crushing ADP job report, solid, consumer-driven GDP growth and strong housing data. Narrowing interest rate differentials nevertheless gave the euro the upper hand against the dollar. EUR/USD jumped to 1.0856. We think the downside around 1.076-1.0778 is better protected from the euro’s perspective. The eco calendar this week still has something in offer for the USD though. PCE inflation for September today is a non-event after yesterday’s Q3 release. But the Employment Cost Index (Q3) and weekly jobless claims serve as wildcards. The October payrolls and manufacturing ISM are due on Friday. We think material upside surprises are needed for dollar strength to have technical implications with the US elections and Fed policy meeting next week drawing close. The US 2-yr and 10-yr are trading around first resistance of 4.2% and 4.3% respectively (38.2% and 50% recovery on the 2023-2024 high-to-low).
News & Views
The Bank of Japan delivered the much-anticipated status quo this morning, keeping the key policy rate level at 0.25%. Updated growth and inflation forecasts barely changed compared with the July update. The BoJ plots a 0.6%-1.1% (from 1%)-1% growth path for fiscal years 2024-2026. Core CPI is expected to average 2.5%-1.9% (from 2.1%)-1.9% over that same time horizon. The BoJ cited a recent decline in oil prices as main reason for the FY2025 revision. The central bank sticks to the view that inflation risks are tilted on the upside. JPY-weakness is an (unmentioned) reason for concern, stoking import prices. One of the reasons why the BoJ didn’t commit to another rate hike (yet) is that it pays attention to the future course of overseas economies, particularly the US’. Governor Ueda holds a press conference later today. USD/JPY trades a tad softer this morning, sliding from 153.50 to 152.80 currently.
Czech National Bank vice-governor Zamrazilova is the first to openly suggest she might opt for a pause as the CNB’s rate cut cycle slowly draws to an end. The policy rate currently stands at 4.25% compared with an estimated neutral rate of at least 3.5%. Zamrazilova still sees room for rates to decrease further, but she’s evaluating how to spread those rate cuts in time. She added that risks to fulfilling the inflation target next year are prevailing at the moment and that’s a reason for caution. Latest eco data suggest that household spending was stronger than in H1 2024 and will probably accelerate further next year, helped by growing real wages. The worsening global outlook nevertheless suggest a downward growth revision at next week’s policy meeting. Money markets discount a 25 bps rate cut, but Zamrazilova’s comments suggests that a pause is possible in December. EUR/CZK continues to trade near this year’s weakest levels (25.40 compared to 25.53 YTD high).
