Markets
Indications that Israel was about to bring boots on the ground in Gaza (City) unsettled markets last Friday as they went into a weekend full of geopolitical uncertainty. Israel eventually didn’t pull the trigger, officially because of the bad weather forecast. Diplomacy, meanwhile, shifted into higher gear over the past few days with the US taking the lead. They are keen to avoid the regional spat to escalate into a wider one that may involve the likes of Iran. It’s enough to bring back some calm to financial markets for the time being, if anything because there was little other news to turn attention to. Stocks in the Asian-Pacific area endured some selling pressure still but equities in Europe stabilized (EuroStoxx50 +0.2%) after sliding about 1.5% end last week. Wall Street opens with gains up to 0.7% (Dow Jones). The rally in oil (supply fears) halted while the one in gold even went marginally in reverse (-0.5%). Core bonds fell with US Treasuries underperforming Bunds. US yields added up to 8.4 bps at the longest maturities. German rates rose between 0.8-4.9 bps, making the curve a bit less inverse. Peripheral yield spreads vs Germany’s 10y yield ease a few bps. Italy’s (credit) risk premium remains above 200 bps though. Italian central bank and ECB governing council member on Friday said that the current increase doesn’t require an ECB response (through its TPI facility), meaning he thinks it’s justified considering the country’s fundamentals. Italian PM Meloni’s cabinet today agreed on the new budget law which won’t bring the deficit not below the 3% threshold until 2026,  year later than previously planned and the reason why spreads, particularly in Italy, started rising sharply.
Dovetailing with risk appetite increasing at the start of the week, the US dollar is losing a few ticks against most peers. DXY drops from 106.648 to 106.4. EUR/USD rises from 1.0507 at the open to 1.054, around today’s highest. The greenback even loses marginally against the yen. USD/JPY is filling offers at 149.43. In the G10 zone, the Swedish krone is outperforming. EUR/SEK slips towards 11.53. The Polish zloty in Central-Europe gets a significant boost from the election victory for the pro-European opposition parties, led by former prime minister Tusk. Even the Hungarian forint profits a little. Poland under the outgoing PiS government has consistently vetoed the EU’s vote-stripping rule-of-law procedure against Hungary (and vice versa). Losing his key ally, investors assume premier Orban now to dial back his staunch opposition. It’s a long shot but in the end it could lead to the long-awaited disbursement of billions of locked-up European funds. Sterling stabilizes around EUR/GBP 0.865 as it goes into an interesting economic update later this week. Tomorrow’s labour market report serves as the kick-off.
News & Views
Polish core inflation (net of food and energy prices) fell by 0.1% M/M in September while markets expected a stabilization. The Y/Y-figure fell from 10% to 8.4% (vs 8.6% forecast). Inflation excluding administered prices fell by 0.5% M/M to 6.8% Y/Y (from 8.9%). The so-called 15% trimmed mean (excluding the impact of 15% of the price basket characterized by the highest and lowest growth rates) was running at 9.3% Y/Y (from 11%). The Polish zloty doesn’t react to today’s inflation numbers, being up around 1.5% against the euro (EUR/PLN 4.47) following this weekend’s parliamentary election which resulted in an opposition victory for pro-EU parties rallied around ex-PM Tusk’s Civic Platform.
The NY Fed’s Empire Manufacturing Survey fell from 1.9 to -4.6 in October (vs -6 expected). New orders (-4.2 from 5.1) fell slightly, just like shipments (1.4 from 12.4). Unfilled orders declined (-19.2 from -5.2), and delivery times (-6.4 from 2.1) shortened. Inventories (-2.1 from -6.2) held broadly steady. Labor market indicators pointed to a slight increase in both employment (3.1 from -2.7) and the average workweek (2.2 from -5). The pace of input price increases was similar to last month (25.5 from 25.8), while selling price increases moderated (11.7 from 19.6). Looking ahead, firms remained relatively optimistic about the six-month outlook (23.1 from 26.3).
