• Yesterday, the ‘Bank of England bond market intervention’ brought some relief to the recent UK (and broader) sell-off. Optimists hoped this to be harbinger of some consolidation. At least for now, this hope stays fragile at best. European markets this morning failed to build on yesterday’s WS risk rebound. The news flow again didn’t help. UK PM Liz Truss indicated she doesn’t intend to backtrack on the government’s growth supportive policy. European economic confidence (93.7 from 97.3) dropped to the lowest level since late 2020, with all sub-indicators contributing to the decline. Despite this further deterioration in confidence/activity, the ECB stays under pressure to show determination in its anti-inflation campaign. Spanish September inflation eased from 10.5% Y/Y to 9.0%, but Belgian (11.3% see infra) and German inflation (2.2% M/M to be up 10.9% Y/Y from 8.8%) again showed highly worrisome readings. Germans yields are off the intraday peak levels but still rise between 3 bps (2-y) and 14 bps (30-y), with the German 10-y yield (2.25%) still near a new closing top for this cycle. US yields are rising between 8 bps (5-y) and 5 bps (30Y yield). US initial jobless claims declined further to 193k from 209k, illustrating a persistently tight labour market. Fed’s Mester repeated that demand is still outpacing supply as Fed rates still aren’t in restrictive territory yet. She clearly isn’t worried about the strong dollar as it helps cooling inflation. Swings in UK yields were less pronounced than recently. The very long end (30-y unchanged) is protected by the (in)visible hand of the BoE. The rise in shorter maturities (2-y + 20 bps) can only be seen as markets being highly sceptic on the UK policy mix. On Equity markets, the EuroStoxx 50 (-2 %), extends its decline below the 3550 support. US indices show similar losses.
• On FX markets, the trading pattern maybe is slightly different from equities or interest markets. The US currency today stayed away from recent peak levels with the DXY index near 113 (compared to a peak of 114.78 yesterday). EUR/USD intraday even revisited the 0.9745/50 area. A break didn’t occur as sentiment remains risk-off but at 0.973 the USD performance maybe is slightly disappointing. Sterling gains modestly against the dollar (cable 1.096) and outperforms the euro (EUR/GBP 0.887). Central European currencies also feel quite some headwinds with regional central banks flagging they have reached (CNB, MNB) or are close to the peak (Poland) of the tightening cycle. Markets especially question this week’s ‘official’ end to the Hungarian tightening cycle as the forint sets a new all-time low at EUR/HUF 423! The zloty is also fighting an uphill battle with EUR/PLN at risk of breaking beyond the 4.85 June top. Even EUR/CZK is challenging the 24.70 mark which was recently ‘shielded’ by CNB FX interventions.
• Belgian inflation accelerated in September to 0.96% M/M with the Y/Y figure surging from 9.94% to 11.27%, the first double digit print since January 1976 and the highest since August 1975. Inflation based on the health index has increased to 11.25% from 9.70%. Core inflation, which does not take into account price evolutions of energy products and unprocessed food, stands at 6.21% in September, compared to 5.74% in August. This is a result of increased inflation for processed food and services. The main price increases in September concerned electricity, natural gas, clothing, alcoholic beverages, domestic heating oil, restaurants and cafés, travels abroad and city trips, purchase of vehicles and rent.
• Germany’s leading economic institutes significantly cut their growth forecasts compared to April numbers. They slashed this year’s GDP prognosis to 1.4% from 2.7% with 2023 GDP now expected to contract by 0.4% compared to 3.1% forecasted expansion in April. The downgrades mainly stem from the drastic increase in energy costs. “The consequences are production stops, losses in value creation, the relocation of production abroad and even plant closures. The number of companies that either do not receive any energy supply contracts at all or only receive them at extreme prices is currently increasing”. 2024 growth is expected just shy of 2%. The (average annual) inflation path stands at 8.4%-8.8%-2.2% for the 2022-2024 period.