• Yesterday, Fed’s Bullard pushed back on recent ‘dovish’ market pricing as he said it is necessary for the Fed policy rate to be raised at least to at least 5.00/5.25%. ECB’s Lagarde in a speech in Frankfurt today wasn’t as concrete as was the Saint Louis Fed president. However, in some way she also reconfirmed the ECB prioritizing inflation over growth. Other ECB members gave a similar assessment (Knot, Nagel). According to Lagarde, rates will have to be raised further and simply removing policy accommodation might not be enough to bring inflation back down to target. A sharp slowdown/recession on its own also won’t do the job. The ECB president also mentioned several structural factors (deglobalization, change in supply patterns, energy transition) that might complicate an easy fix of the supply/demand balance, holding the risk of higher costs/inflation. Interest rates remain the preferred instrument to address inflation, but the ECB also has to reduce excess liquidity/balance sheet. Key principles of reducing bond holdings will be set out at the December policy meeting. As was the case for interest rate policy, Lagarde again didn’t give specific levels/amounts. European interest rates drifted higher during Lagarde’s speech, but this move was undone later. A rather low amount of TLTRO repayments after the ECB changed conditions of cheap funding added to the reversal. The ECB announced it next week expects a repayment of € 296 bln of LT funding. Estimates were diffuse but most saw a potential for a € 500/600 bln repayment. Especially short-term Bunds outperformed after the TLTRO announcement. The 2-year German yield currently even declines 4 bps. The spread of swaps over Bunds widens (less collateral than expected will be freed). Further out (5-y +) German yields also reversed the earlier rise to currently trade 2 bps lower. US yields also tried to cautiously extend yesterday’s rebound, but the move was aborted early in US dealings. US yields currently are trading mixed (2-y +1.5bps; 30-y -1.5 bps). Despite recent, more hawkish CB speak, equities are performing well with the EuroStoxx 50 gaining 1.2%. US indices open about 0.5% higher. The oil price continues this week’s sharp setback, with Brent smashing below $ 90 p/b ($ 86.25 currently).
• Moves in the major USD cross rates are limited. DXY is holding a tight 106.40/80 range. EUR/USD is changing hands near 1.0360, unchanged from yesterday’s close. USD/JPY struggles not to lose the 140 handle (currently 139.8). Sterling slightly outperforms. This morning, GFK UK consumer confidence improved slightly and (nominal) retail sales (+0.6% M/M) grew modestly after two difficult months. EUR/GBP neared the 0.8690 short-term support, but a break didn’t occur.
• The Norwegian economy grew a strong 0.8% q/q in the previous quarter of this year. This followed an upwardly revised 1.2% in Q2 and surpassed expectations of 0.4%. All components but government consumption (-0.1% q/q) contributed. Household consumption grew by 0.5% q/q, flanked by gross fixed capital formation (0.4% q/q). Exports grew at 5.7% almost double as much as imports did (2.9%). Factoring in the oil sector, Norwegian GDP growth even amounted to 1.5% q/q thanks to boosted petroleum activities (7.6% q/q). The Norwegian krone barely budged with EUR/NOK stabilizing at 10.49.
• Germany’s largest union secured a benchmark 5.2% pay increase for a little less than 4 million employees in the automotive, metal and electrical sector in the Baden-Württemberg region. The rise next June would be followed by a 3.3% increase in May 2024. Additionally, a lump sum payment of €1500 will be given in each of the next two years. The pact is likely to be repeated across the sector in other parts of the country. It comes as German inflation hit 11.6% in October, suggesting that stellar price increases are not yet fully reflected in wage demands, reducing the risk of a vicious and hard-to-control wage-price spiral. The ECB forecasted that wage growth will increase from 4% this year to 4.8% next year.