Sunset Market Commentary

Markets

The fall-out of Reeves’ “one of the largest fiscal loosenings of any fiscal event in recent decades” on UK bond markets went into a second day. Gilt yields sprint another 10.1 (30-yr) to 19 (2-yr) bps higher with new YtD highs for all maturities >5 years. The front-end is heavily influenced by central bank expectations. Markets trim their Bank of England easing bets at a lightning pace, with currently only expecting an amount of 83 bps over the next 12 months. This compared to (an already meagre) 100 bps yesterday and 114 bps the day before. Just month ago, the counter stood at +/- 150 bps. Despite this lofty front-end support, sterling loses out both against the dollar and the euro. That suggests a lot of risk premia is behind the rise at the long end, which isn’t per se a good thing for GBP(or any other currency). EUR/GBP is advancing towards the 0.84 big figure. Breaking higher ahead of the weekend would turn the technical picture more neutral for the pair. In other core markets, Bunds heavily underperform US Treasuries. Yesterday’s stronger-than-expected Q3 GDP numbers and reaccelerating inflation (headline back at 2%, core stable at 2.7%, services at 3.9%) challenges markets (perhaps too) pessimistic view on the euro area economy. German yields add another 1.2 (30-yr) to 8.9 bps (2-yr). Germany’s 10-yr (+3.5 bps) spread vs swap (+0.1 bps) is <2 bps away from turning positive again for the first time in the history of the euro. With Germany’s 10-yr used as the key benchmark to measure risk premia against, this is more than symbolically important. Treasury yields add between 0.7 and 3.7 bps across the curve. US eco data included a slightly lower-than-expected Employment Cost Index of 0.8% vs 0.9% consensus for Q3. That was offset by an unexpected drop in jobless claims from 228k to 216k – the lowest since May of this year. PCE deflators for September could be derived from yesterday’s Q3 outcome so they came in broadly in line with expectations. The Japanese yen outperforms global peers in currency markets though moves are contained. USD/JPY eases to 153.04 in the wake of the BoJ’s policy meeting this morning. Governor Ueda confirmed hikes will continue if the inflation outlook materializes. EUR/USD stands pat at 1.085, awaiting its next potential mover: tomorrow’s October payrolls report.

News & Views

Polish inflation accelerated from 0.1% M/M in September to 0.3% in October (vs 0.4% consensus). The annual figure ticked higher, from 4.9% Y/Y to 5% Y/Y in which is the highest since December of last year. The increase was driven by food prices (4.7% Y/Y to 4.9% Y/Y) and energy prices (11.5% Y/Y from 11.4% Y/Y; low base effect in October 2023). Core inflation will only be published mid-November but likely remained stuck above 4% Y/Y. Elevated price pressure is the key reason why the National Bank of Poland didn’t restart its cutting cycle yet, pointing to the March 2025 inflation report as potential kick-off point. Markets recently started erring to the side of a quicker start on the back of some disappointing eco numbers. The Polish zloty remains in the defensive, caught by international moves and changes on NBP thinking, with EUR/PLN (4.35) gradually returning to the YTD highs around 4.40.

The Norges bank announced that it will purchase FX on behalf of the government equivalent to NOK 150mn per day in November. That’s down from 400mn/day in October and the lowest level of FX buying since March 2022. The Norges Bank carries out FX transactions related to petroleum revenue spending over the central government budget and saving in the government pension fund. The lower volume is linked to a revision to this year’s fiscal spending in the latest budget plan. There is some speculation that the Norges Bank could morph into a net seller of FX from next year on linked to a shift in the government’s liquidity management policy. A possible announcement is due in December or January and could help the ailing Norwegian currency which is amongst this year’s weakest performing currencies losing over 6% against the euro. EUR/NOK is closing in on the 2023 & 2024 highs around 12.