Markets
After further bond gains post the softer than expected US data last week, sentiment changed course yesterday. Several ECB speakers including Vice President de Guindos warned that it’s premature to open the debate on rate cuts as inflation risks linger. Core yields at several maturities testing key support levels also made a further decline (in yields) less evident. However, moves mostly remained gradual during European trading hours. The German 2-y yield even declined 0.9 bps. The 10-y gained 3.0 bps. The 30-y underperformed (+7.0 bps). Later in US dealings, the $24 bln 30-y US Treasury auction went much more difficult compared to the 3 & 10-y sales earlier this week. A substantial yield concession put additional pressure especially at the longer end of the curve. Fed Chair Powell later at the IMF’s annual research conference also held some kind of ‘leaning against the wind’ attitude. He reiterated that the Fed can move carefully to both ‘address the risk of being misled by a few good months and the risk of overtightening’. Despite this two-sided risk, the Fed Chair stressed that progress toward to 2.0% goal is not assured and that the Fed won’t hesitate to tighten policy further if this would turn out to be appropriate. On broader financial conditions, Powell indicated that the Fed takes higher long-term yields into account, but it depends on how long the market move lasts. After Powell’s comments short-term yields also jumped higher but in the end the curve still bear steepened with the 2-y adding 8.9 bps while the 30-y jumped 15 bps. The 2-y yield again closed just north of 5%. The rise in US yields both due to the poor 30-y auction and Powell’s comments also pushed equities back in red (Dow -0.65%, Nasdaq -0.94%). The EuroStoxx 50 earlier closed with a nice +1.21%, regaining the 4200 mark. The dollar extended its comeback (DXY 105.91, EUR/USD 1.067), but the technical picture after all remains neutral. USD/JPY (close 151.35) again nears the multi-year peak levels (YTD top 151.72/2022 top 151.95).
Asian equity markets this morning join the setback on WS yesterday evening. Treasury yields are easing marginally. The dollar trades little changed (EUR/USD 1.067, DXY 105.9). Later today, November Consumer confidence of the University of Michigan will be published. Markets will keep a close look at the inflation expectations measures of the report. Also look out for an interview of ECB’s Lagarde with Martin Wolf for the FT. We expect the ECB Chair to reiterate that it is much too early to call victory on inflation. EMU yields probably still have some catching up to do after yesterday’s rise in the US. The first estimate of the UK Q3 GDP this morning was reported unchanged (0.0% Q/Q), slightly better than expected (-0.1%). However, the details were unconvincing with private consumption, government spending and gross fixed capital formation all declining on a quarterly basis. On the other hand, September activity data (especially services) where not that bad. In a first reaction, sterling gains marginally (EUR/GBP 0.8725).
News & Views
The Reserve Bank of Australia published its quarterly Statement on Monetary Policy following this week’s meeting when it lifted the policy rate by 25 bps to 4.35%. Detailed forecasts show a somewhat stronger growth path (1.25% for year-ended Dec23 from 1% and 2% for year-ended Dec24 from 1.75%) in combination with a more stubborn return of inflation towards the 2-3% inflation target (3% for year-ended Dec25 from 2.75%). Unemployment is expected to peak at 4.25% in Dec24 and stay there over the policy horizon. Back in July, the RBA estimated a 4.5% peak with unemployment ticking up faster. AUD/USD just like on Tuesday fails to profit from the slightly more hawkish RBA with AUD/USD holding around 0.6370.
Portuguese president Marcelo Rebelo de Sousa set March 10 as next (snap) general election date following this week’s resignation by Socialist PM Costa in the aftermath of a corruption investigation. Costa’s chief of staff Vitor Escaria and infrastructure minister Joao Galamba are central in the probe with PM Costa suspected of interventions to unblock procedures. Ruling Socialists won a resounding victory early last year and were significantly ahead in the polls ahead of the developing scandal.
