Click here to read the PDF-version of this report.
• THE BIG ONE-OH! EMU CPI inflation hit the big one-oh in September. The first double digit reading on record. Price growth accelerated again on a monthly basis (1.2% M/M vs 0.9% expected) with the Y/Y reading thus rising to 10% from 9.1% (vs 9.7% expected). It had been coming after mostly upward national inflation surprises over the past 24 hours. Underlying core inflation accelerated from 4.3% Y/Y to 4.8% Y/Y (vs 4.7% expected). The increase was broad-based across all categories. With the unemployment rate in a separate report stabilizing at 6.6%, this settles the deal for a rate hike of (at least?) 75 bps by the ECB in October. We don’t see scope for slowing down the pace by December which implies an ECB deposit rate of (at least?) 2.25% by the end of the year. Inflation will continue hovering around/above current levels the next couple of months with the hit on households’ disposable income not translating in weaker price pressure yet. Over the course of 2023, we expect ECB policy rate to easily exceed 3%. That remains a more hawkish stance than current market pricing even after the strong repositioning of the past couple of sessions. ECB Elderson added to recent hawkish ECB comments by stressing the risk of a de-anchoring of inflation expectations and warning not to underestimate Frankfurt’s resolve to hit the 2% price goal. Markets ignored the outcome. It had been coming especially after yesterday’s German numbers and it has been a hell of a ride since mid-September. We suggested the start of a correction/consolidation period earlier this week after the Bank of England decided to step in the market with long Gilt purchases to stop the rot. It’s been volatile since, but we feel comforted by today’s actions. End-of-quarter buying and the weekend ahead could be at play as well. The German yield curve bull flattens with yields ceding 4.7 bps (2-yr) to 9.5 bps (10-yr). Underlying dynamics continue to point to lower inflation expectations (approaching 2%) and higher real rate. The German 10-yr real rate turned positive today for the first time since 2014. The US curve moves in similar fashion with yields correcting 2.1 bps (2-yr) to 8.4 bps (10-yr). Fed speak included Vice Chair Brainard who mentioned the Fed’s commitment to avoid pulling back prematurely implying restrictive rates for some time. That was already visible in this month’s updated FOMC dot plot which showed that nearly all governors believed policy rates should stay above neutral (2.5%) over the policy horizon (reaching until 2025). EUR/USD drifted south after bouncing away from the low 0.95-area earlier this week with the pair changing hands near 0.9750. EUR/GBP is going nowhere at 0.88. Stocks record modest gains (+0.5%).
• Polish inflation surged 1.6% M/M in September, double the pace the month before as the negative drag from faltering fuel prices dropped considerably (-2.1% m/m in September compared to -8.3% in August). Inflation on a yearly basis came in at 17.2%, more than the 16.4% expected and the highest since 1996. KBC Economics estimates core inflation to have entered the double digits around 10.7% y/y. The numbers exceed the National Bank of Poland’s July forecast and turned the expected inflation peak (just below 19% in 2023Q1) again obsolete. The NBP was expected to deliver a final 25 bps rate hike to 7% at the policy meeting next week as it increasingly becomes growth-sensitive. But it’s now highly uncertain whether this indeed will be the terminal rate. Markets ramp up speculation for more tightening to come with money market yields shooting up to 20 bps higher. The back-end of the curve drops up to 10 bps. The Polish zloty briefly touched EUR/PLN 4.90 before paring gains to trade unchanged at 4.85. It is nevertheless the weakest level since the March volatility following the Russian invasion.
• Ministry of Finance data showed that Japan spent a record 2.8tn yen (about $20bn) in FX markets in the period from August 30 to September 28, draining 15% of the funds readily available for interventions. The previous record dates back to 1998 and stood at 2.62tn yen. This time though, it is assumed that the MoF spent this amount on a single day. USD/JPY surpassed 145 on Sep 22 before tanking more than 5 big figures intraday. The currency pair since then continued to hover around that 145 level, showing how ineffective such one-sided actions usually are.
Graphs & Table
EUR/PLN: zloty under pressure. Will NBP stick to peak rate talk amid umpteenth upward inflation surprise?
German 10y real yield turns positive for the first time since 2014. ECB rate hikes are coming!!
USD/JPY: 15% intervention reserves down the drain
GBP/USD: attempt to completely undo last week’s bleeding unlikely to succeed ahead of the weekend
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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