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• UK gilts underperformed German Bunds and US Treasuries today. Fitch’s decision to lower the outlook on the country’s AA- rating from stable to negative triggered the move. The rating agency cited increased fiscal risks coming from the government’s lavish spending plans. UK yields add 10.2 bps (2-yr) to 14.3 bps (30-yr) with intraday dynamics at the very long end suggesting some meddling by the Bank of England. Sterling underperformed marginally with EUR/GBP setting and intraday high near 0.8790 from an open at 0.8720. US yield changes vary between -0.2 bps (30-yr- and +2.3 bps (5-yr). It’s a relative quite day for US investors following ISM’s and ADP employment earlier this week. Weekly jobless claims increased slightly more than expected (190k to 219k), but remain near historically low levels. US markets today clearly trade with tomorrow’s payrolls in mind. The German yield curve steepens with yield changes ranging between -2.5 bps (30-yr) and 4.7 bps (2-yr). There’s again a strong outperformance of bonds compared to swaps. The European swap rate curve rises up to 9.3 bps at the front end. Moves at the shorter tenors aren’t related to the publication of ECB Minutes. On the contrary. Yields temporary dipped as they revealed that some officials proposed a 50 bps rate hike instead of 75 bps given recession risks. The overall tone remained more hawkish though. Growth concerns shouldn’t prevent forceful rate hikes. Even chief economist Lane warned that price pressures are likely to persist. The euro failed to profit from the interest rate support with EUR/USD losing the 0.99 big figure again to currently change hands below 0.9850. Overall risk sentiment is sluggish with European indices losing around 0.5% after a positive open and the UK FTSE underperforming (-1%). Yesterday’s big OPEC production cut grabs a lot of attention, but Brent crude trades flat near $93.25/b. The commodity rallied the days ahead of the decision as the 2mn barrels/day production cut was rumoured.
• Momentum in retail sales in Hungary and the Czech Republication is deteriorating quite substantially. The Czech statistical offices reported that sales in retail trade (real terms) in August declined 0.7% M/M to be 8.8% lower compared to the same period last year. (Real) sales of non-food goods decreased 10.3% Y/Y, sales of automotive fuels declined 9.2%. Real food sales were 6.6% lower compared to last year. In a comment, the CZSO indicated that sales declined across all categories except for chemist, medical and orthopedic goods.Retail trade in Hungary also slowed substantially more than expected to 2.4% Y/Y from 4.3% Y/Y in august. Sales of food decreased by 2.4% Y/Y. Non-food sales increased slightly (+0.5%). Automotive fuel sales were 18.4% higher compared to the same period last year. Data suggest that domestic demand in both countries is slowing. Both the Czech central bank and the Hungarian central bank will take this into account when assessing the supply and demand balance in their economies as they look for a deceleration of price growth.
• In a letter to the Chair of the UK Treasury Committee, Deputy BoE Governor for Financial Stability Cunliffe provided an explanation for the Bank’s unusual market intervention as the BoE deployed a £65bn program to stabilize the market in long dated Gilts last week. The letter describes how this market destabilized after the announcement of the Mini budget by Treasury secretary Kwarteng on September 23. Especially the likelihood that liability-driven investments funds (LDI’s) that are used by pension funds would be forced to further sell huge amounts of long term Gilts caused to BoE to step in. The BoE also clearly stated that the program only aimed at restoring financial stability. The “operations are not intended to create central bank money on a lasting basis, nor are they designed to cap or control long-term interest rates”. Once the purchase program is completed and risks to market functions are judged by the BoE to have subsided, the operation will be unwound in a smooth and orderly fashion.
Graphs & Table
UK 30-yr yield underperforms again as Fitch cuts rating outlook. Bank of England on alert.
EUR/HUF: forint heading for weakest close ever with national data sounding the growth alarm
EuroStoxx50: sell-on-upticks remains name of the game
USD/JPY: Invisible hand of the BoJ at work at 145?!
This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.
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