Sunset Market Commentary

Markets

The UK Office for National Statistics published September labour market data this morning. They continue to struggle with mixed results coming from estimates for payrolled employees and estimates based on the labour force survey. Payrolled employees fell by 9k over the period comparable with the LFS estimates (July-September) which showed a 220k increase in employment. The early estimate of payrolled employees for October decreased by 5k. The unemployment rate increased to 4.3% in Q3, up from 4%, but the labor force participation rate rose to 74.8% from 74.1% over the same period. The estimated number of vacancies in the UK decreased in August to October 2024, by 35k on the quarter to 831k; the 28th consecutive decline, but still above pre-COVID levels. Average wages (excl. bonuses) remained elevated at 4.8% for the July-September period compared with a year ago. This total annual growth is affected by the civil service one-off payments made in July and August 2023. The front end of the UK yield curve underperforms today, in line with the move on the US Treasury market. UK money markets further reduce December rate cut bets (17% currently). As long has the economy doesn’t all of a sudden collapses, gradualism is key both in the UK and in the US. Bank of England chief economist also specially mentioned today’s wage growth as being quite sticky, at elevated levels and hard to reconcile with the UK inflation target. “Our job is not done”, he added. Sterling failed to bank on today’s yield advantage (German yields give away 1.7 bps at the front end), but remains below EUR/GBP 0.83 suggesting a return to the 2022 low of 0.8203 remains the preferred short term route.

By default USD strength since Trump’s republican sweep is name of the game. EUR/USD set an intraday low at 1.0607, just above the 1.0601 YTD low which is final support ahead of the 2023 range bound of 1.0448. Today’s disappointing German ZEW investor survey obviously failed to improve the picture. The ZEW current situation index declined from -86.9 to -91.4 (vs -85 expected). For comparison: at the height of the pandemic, the ZEW indicator only printed below -91.4 on two occasions (April & May 2020). The same goes for the height of the financial crisis (April & May 2009). The forward looking expectations gauge dipped from 13.1 to 7.4 (vs 13.2 expected). Donald Trump’s victory and the end of the coalition negatively impacted the results, but ZEW president Wambach added that: “In the last few days of the survey period, however, more optimistic voices are also becoming increasingly vocal about the economic outlook for Germany due to the likelihood of early elections.”

News & Views

Hungarian prices increased by 0.1% m/m to be up 3.2% y/y in October compared to 3% in September. Food and clothing & footwear amongst others became more expensive (0.7% and 3% m/m respectively) but services prices dropped 0.9%. The outcome undershot expectations for a price rebound of 0.4% m/m and 3.5% y/y. The central bank’s core inflation gauges all eased as well and now hover between a 4.5-5% range. The inflation surprise, however, won’t make the Hungarian central bank switch tack. Its vice-governor flagged a “sustained” pause last month over concerns about the ongoing weakness and thus inflationary effect of the Hungarian currency. Since then, the forint tanked even further as the fall-out of president-elect Trump’s election victory continues to affect all corners of the market. EUR/HUF is currently trading north of 410, the highest (HUF-weakest) level since end-2022, suggesting the MNB’s turnaround offers little support for the forint so far. There’s little in the way from a technical point of view for a return towards the 2022 all-time HUF-lows around EUR/HUF 430.

Germany is set to hold federal elections on February 23, seven months earlier than scheduled. The snap elections follow the collapse of the government last week over the so-called debt brake. The current chancellor and SPD leader Scholz is said to hold a vote of no-confidence – the trigger needed to be able to hold new elections – on December 16. The February 23 data is a compromise between the opposition/CDU-CSU calling for a sooner vote (and banking on a lofty lead on the polls) and Scholz who wanted a mid-March election.