• We’ll dive into some central bank comments in absence of other stories in today’s rangebound, waiting game session. ECB vice-chair de Guindos didn’t provide much guidance when it comes to future interest rates. He went with the data dependence line saying the rate peak will depend on the data that the ECB receives, the evolution of inflation, economic conditions, demand and energy prices. Headline and core inflation will remain very high next year even if he expects to see some topping off in H1 2023. On quantitative tightening, he prefers the start of a passive version in 2023 by not fully reinvesting the maturing securities in the APP portfolio. Over the next 12 months, APP redemptions average around €30bn with a minimum amount of €15bn. Assuming that the latter serves as a monthly floor, the APP portfolio could shrink some €180bn in its first year, which is slightly over 5% of the €3.2tn bond portfolio. German Bundesbank Nagel was more aggressive on the rate topic. More rate hikes are needed to bring down inflation and the ECB mustn’t let up too early on normalization even if that weighs on growth. The latter marks a contrast with Bank of England’s Chief Economist Pill. He thinks that the BoE should try to manage the recession, not cause one. Additionally, he’s not convinced that front-loading rate hikes has a big impact in reining in inflation expectations. The BoE in his view already did a big part of the heavy lifting. Rates may rise further from the current 3%, but unlike the ECB, the UK central bank seems to be thinking about the end point.
• Above-mentioned comments have no market impact. This week’s key events are tonight’s US mid-term elections and Thursday’s US CPI print. Republicans are expected to flip the House while the Senate remains a toss-up. In October US inflation numbers, we might see more evidence of topping of headline inflation but accelerating underlying core inflation. Such combo could keep 75 bps December Fed rate hike bets alive given ongoing labour market strength. The German yield curve flattens in a daily respective with yields around 3 bps higher at the front end of the curve and down 2 bps at the very long end. US yields drop 2 to 3 bps across the curve. European bourses record gains of up to 0.5% with key US indices opening mixed. EUR/USD switches sides around parity with EUR/GBP up a few ticks at 0.8740. We recently mentioned outperformance of smaller currencies, including CEE FX. The Czech koruna, Polish zloty and Hungarian forint today trade in the defensive with technical elements likely at play. EUR/CZK bounced off the April/July/August bottom of 24.25. EUR/PLN approached, but didn’t really test 4.65 support before today’s counter towards 4.70. EUR/HUF for now fails to take out 400 support (previous cycle high & incoming upward trend line).
• Ireland’s Foreign Minister Coveney said the UK’s new government under Sunak provides an opportunity to strike a deal in the standoff between the EU and UK over Northern Ireland’s trade arrangements. According to Coveney, a settlement is doable by the end of the year, citing “a real intent in London to try to resolve the protocol issues through negotiation.” The stalemate also comes with consequences for the formation of a Northern Ireland government as the DUP refuses to join the power-sharing executive until the protocol is scrapped or meaningfully altered. NI elections were held back in May but new elections under UK law are due within 12 weeks of October 28. But the Secretary of State for Northern Ireland has already ruled out elections happening this year.
• The Czech National Bank’s foreign exchange reserves dropped by 4.4bn euros in October to 131.63bn euros. The CNB started intervening in FX markets in May to prevent a weakening Czech koruna from further fueling inflation. Reserves since then have dropped by almost 30bn euros, or some 18% of the total amount. In May/June this year, the CNB put a bottom below the koruna around EUR/CZK 24.75. From August, it targeted the EUR/CZK 24.65 area. The Czech currency today is trading at EUR/CZK 24.33, matching the temporary CZK highs seen last summer.