Markets
This week was amassed with high profile political and monetary event risk potentially providing one (or more) gamechangers for global trading. A congestion of central bank decisions including the Fed, the Bank of England and a long list of smaller central banks, were supposed to give some guidance on where they position themselves on the path of policy easing. The Banco of Brazil (a trendsetter) already switched sides raising the interest rate further. However the monetary policy setup, this time evidently was overshadowed by the outcome of the US Presidential and Congress elections. Especially if one had known the outcome in advance, one probably would have predicted a landslide on global markets. On top of that an (un?)expected break-up of the German government coalition also foreshadowed a regime change. Let’s overlook the market outcome of this historic week (compared last Friday’s close). Admittedly, the starting point of such an of exercise has some arbitrary character. Nevertheless this the result.
The biggest reaction occurred on (US) equity markets. US major indices added about 4.0% to 5.5% to touch record levels on an expected growth-friendly policy of the Trump administration. European equities (Eurostoxx50) over the same period lost about 1.25%. Moves in yields were far less spectacular and maybe in the end a bit contra-intuitive compared to the high profile (political) story. US yields declined between 4 bps (2-y) and 10 bps (10-y). Admittedly, this outcome masks a sharp rise annex correction in two session after the US elections. Even so, it remains striking that what is seen as a potential aggressive shift to a reflationary US policy (both in terms of growth and inflation) only yields this modest result. Maybe markets took a bit of a similar attitude as did the Fed yesterday. Powell and Co when cutted interest rates (25 bps ), indicated that they saw little impact from the election outcome short-term. No concrete measures are yet available and they will be executed in a very complex and unpredictable context. In this respect, political event risk probably still is more ahead of us than behind us. German yields moved between 4.0 bps (2-y) and +0.4 bps (30-y). For now, markets don’t draw firm conclusions from budget orthodox German Fin Min Lindner being fired by Chancellor Scholz, potentially opening the way for a more stimulative fiscal policy, too. EMU interest rate markets in a first reaction to the US election outcome even positioned from more ECB easing to counterbalance the impact of US trade tariffs on EMU growth. Maybe, fiscal policy also has a bigger role to play than markets currently contemplate. Again, (positive) budgetary event risk might still be ahead of us. In the UK, the BOE acknowledged the reflationary impact of the Labour budget, but it didn’t derail the process of cautious removal of policy restriction yet. Finally, FX markets also didn’t draw any unequivocal conclusion. The dollar initially followed the spike higher in US yields, but in a weekly perspective gains are modest (DXY +0.5%, EUR/USD -0.75%). If EMU fiscal policy also turns more growth-friendly, the euro over time might also be (a bit) less vulnerable in the Trump era than markets feared up until now.
News & Views
Czech National Bank governor Michl said that monetary policy must stay restrictive: “the policy mix for the future should be, firstly, keeping interest rates higher than before Covid for the next 10 years and secondly, which is also important, governments must balance their budgets. Because if they don’t do it, there could be the risk of a second wave of inflation.” Core inflation should remain “slightly below” the central bank’s 2% target, Michl said. After yesterday’s 25 bps rate cut, the CNB is discussing when to bring rate cuts to halt, since that (core CPI) goal hasn’t been met, the central bank chief added. He declined to provide a timeframe for a potential policy shift. The Czech koruna extends gains after yesterday’s hawkish cut with EUR/CZK currently changing hands at 25.20 after testing the 25.40 resistance area earlier this week.
Canadian payrolls showed 14.5 net job growth in October, coming in below 27.2k consensus. Details however showed that net lay-offs in part-time jobs (-11.2k) pulled the full time employment change number (+25.6k) down. The unemployment rate stabilized at 6.5%, but the participation rate ticked down from 64.9% to 64.8%. That’s the fourth consecutive decline and the lowest since December 1997 (excluding the Covid-years 2020 & 2021). Total hours worked rose 0.3% M/M and 1.6% Y/Y. Average hourly wages among employees increased 4.9% Y/Y in October, following growth of 4.6% in September. The Canadian dollar didn’t respond to the labour market data. USD/CAD is trading at 1.3912, staying close to YTD resistance levels around 1.3950.
 gamechangers for global trading. A congestion of central bank decisions including the Fed, the Bank of England and a long list of smaller central banks, were supposed to give some guidance on where they position themselves on the path of policy easing.){kind=link}