Markets
With only second tier data/news, there was no reason for markets to change course on the new corrective trends. Headline US PPI was marginally stronger than expected (0.5% M/M, 2.2% Y/Y vs 0.3% & 1.6% expected). However, with the core easing from 2.9% Y/Y to 2.8%, there was little reason for investors to consider any prepositioning going into today’s CPI. The US 10-y auction was average. The Minutes from the September 20 FOMC meeting showed a broad consensus that policy should be restrictive for some time. The majority of the governors still expected that one additional hike could be needed this year. However, as policy is now clearly in restrictive territory risks have become more two-sided, allowing the FOMC to proceed more carefully. The impact of the minutes of trading was modest. For US short-term yields, the downside is rather well protected as there is little reason for markets to row against the higher for longer mantra (2-y +1.25 bps). Yields at longer maturities simply continued their post-payrolls correction with the 30-y ceding another 13.8 bps. The 10-y US real yield also eased back to 2.24% compared to a cycle peak of 2.58% late last week. Similar story line for European/German bond markets. The 2-y German yield added 3.8 bps. The 30-y still declined 10.8 bps. Marginally rising inflation expectations at the ECB consumer survey again were largely ignored. European equities (EuroStoxx 50 -0.1%) took a breather after Tuesday’s sharp rally. US indices added up to 0.7% (Nasdaq) as market see the Fed nearing the end of its tightening cycle. Despite lower real yields and a constructive risk sentiment, the dollar correction develops in a very gradual way. The DXY USD index closed little changed at 106.82. EUR/USD closed at 1.062 from 1.0605 on Tuesday evening. Brent oil dropped from $88/b to $85.5, reversing the ‘war premium’ after the start of the war between Hamas and Israel.
Asian risk-sentiment is positive this morning, joining the positive tone on WS yesterday. Chinese markets were additionally supported as a state-owned investment fund reports to have raised its stakes in local banks. Later today, the focus turns to the US September CPI. Markets expects inflation to have eased further to 0.3% M/M and 3.6% Y/Y for the headline and 0.3% M/M and 4.1% for core. Given current market bias, a substantial upside surprise is probably needed to reverse the developing correction of lower LT yields and a softer dollar. US jobless claims, a $20bn 30-y US bond sale and the monthly US budget statement are wildcards. 4.50%/4.36% (23% retracement/previous top) remains first important support for the US 10-y yield. EUR/USD nears the 1.0635/1.0643 area. The UK monthly GDP published this morning printed as expected (0.2% M/M). Industrial activity again disappointed (-0.7% M/M). The services sector showed better resilience. Sterling eases marginally with EUR/GBP at 0.863 gaining a few ticks after modest sterling gains earlier this week.
News and View
Former Slovak PM Fico who won September 30 parliamentary elections with his SMER-party is set for a return to office after securing a deal with center-left Hlas presided by another former PM (Pelligrini) and the Slovak National Party (SNS) in what is considered a populist-nationalist coalition. Together, they have 79 out of 150 seats in parliament. Pelligrini will be speaker of parliament. Fico has an open anti-EU view on topics ranging from Russia to climate to migration, which are shared by SNS while Hlas is nationalist in the sense that it aims to strengthen the state’s role in the economy. To beef up Slovakia’s finances in 2024, PM Fico could be looking for a special levy on the financial sector modelled on the Italian one introduced by PM Meloni.
The Royal Institution of Chartered Surveyors (RICS) published its UK residential survey for September. The report depicts the continuation of a challenging market backdrop, with interest rates continuing to hamper mortgage affordability, and the disparity between tightening lettings supply and rising demand causing rental price rises. New buyer enquiries points to consistent weak demand, though less negative than in August (-39% vs -46%). The same goes for agreed sales (-37% from -46%) and sales expectations for the next three months (-24% from -36%). Going forward, near-term expectations point to a further price pull-back over the next three months, although again not quite as negative as in August (-48% from -65%). A net balance of +43% of survey participants saw an increase in tenant demand in the lettings market in September while there is a rising scarcity of listings becoming available on the rental market (-24%), squeezing rent prices higher (5% growth expected over next 12 months).
