Sunset Market Commentary

Markets

European yields and the euro today gained minor further ground after succeeding an intraday reversal yesterday after the ECB 25 bps cut (to 3.0%). First post-meeting comments from ECB policy makers confirmed that more easing will follow. Internal debate on the pace (Kazaks still keeps the door open for a bigger step) and the end-point continues (Villeroy sees bets on 100 bps + easing as reasonable). Still, gradualism apparently is seen guiding ECB policy for now (Centeno, amongst others). Comments didn’t change the recent tentative bottoming in EMU yields. German yields today add between 1.0 bps (2.0-y) and 2.5 bps (10-y). US yields show a broadly similar pattern (2-y + 1.5 bps; 30-y +2.5 bps) as markets are counting down to next week’s FOMC meeting. French president Macron naming François Bayrou as new Prime minister (cf infra) had only limited impact on markets. The euro initially also tried a (corrective?) rebound. EUR/USD intraday filled offers in the 1.052 area, but the move ran into resistance as US traders joined (currently 1.05). The 1.0335 support survives going into the weekend. The yen underperformed. The BOJ Tankan report published this morning was ok, but it wasn’t able to counterbalance market rumours that the BOJ considers to wait with a rate hike at next weeks policy meeting. UD/JPY extends its recent rebound (153.4). Equities in EMU (Eurostoxx 50 and S&P 500 +0.3%) show modest gains. Oil also gains marginally ($ 73.6 p/b).

Sterling of late outperformed the euro as it was considered avoiding/being less sensitive to a long range of negative developments that haunted the single currency. However, a set of mixed UK data grabbed the market focus today. According to UK GFK confidence, UK consumers turned a bit more optimistic on their personal financial situation, but still have low confidence on the overall UK economy, currently and in the year ahead. UK monthly production (October) was unexpectedly weak (-0.6% M/M after already a 0.5% monthly decline in September). Services and construction output also disappointed resulting in a -0.1% monthly GDP estimate. Mid-morning, the BOE/Ipsos inflation attitudes survey showed that consumers assessed current inflation to have declined (4.8% from 5.2% in August), but expectations on future inflation rose again for all time horizons (3.0% from 2.7% 12 months ahead, 2.8% from 2.6% in the following year and 3.4% to 3.2% long term). Weak activity and high inflation expectations for sure isn’t something for the BoE to feel comfortable about. UK yields currently trade marginally higher (1 bp across the curve), but doesn’t help sterling. EUR/GBP earlier this week looked like preparing a real test of the key 0.8203 2022 low. Today’s data apparently provided the perfect mix for investors to scale back some EUR/GBP shorts. The pair jumped from 0.826 to currently test the 0.83 big figure, admittedly with some minor support from the euro, too.

News & Views

Fresh Bundesbank forecasts suggest the German economy will barely grow next year after having contracted this year. 2024 forecasts were lowered form a 0.3% growth prediction in June to -0.2% while output next year would expand by just 0.2% (vs 1.1% earlier). The Bundesbank does not exclude another year of negative growth if president-elect Trump makes good on his tariffs threats. If he would slap a 10% levy on European imports and 60% on Chinese goods, Buba estimates this could knock between 0.2-0.6 ppts of GDP next year. “The German economy is not only struggling with persistent economic headwinds, but also with structural problems,” Bundesbank President Joachim Nagel said, adding that the labour market is now also showing signs of finally succumbing. Growth for 2026-2027 is seen at 0.8% and 0.9%. Inflation would ease from 2.5% this year to 2.4-2.1-1.9% in the following years.

French president Macron announced François Bayrou as France’s new prime minister. His predecessor Michel Barnier, presiding over a minority government, was ousted last week in a no-confidence vote after pushing through a budget bill that angered the opposition from (far) left and right. Bayrou is a centrist politician with a market-oriented view of the economy but equally supports social measures such as taxing the wealthy. His appointment, however, immediately drew oppositional backlash from all sides of the political spectrum. It suggests his task of addressing France’s derailed public finances won’t be much easier than Barnier’s. Assuming unrelenting opposition from the political extremes, Bayrou will need support of the Socialists and perhaps the Greens without alienating the right-wing flank to pass a budget. France budget deficit is expected at 6% of GDP this year, double the 3% EU limit.