Market Movers Today
Today, the markets will focus on the HICP inflation data for the Euro-Zone. Yesterday’s country releases were slightly lower than expected, suggesting that the euro area total will end up around 3%, down from 4.3% in September. The Spanish and German data showed some promising signs regarding core inflationary pressures in the euro area.
At the same time, we will get Eurostat’s first estimate of Q3 GDP, which is likely to show that economic activity came close to a standstill in Q3.
In the U.S., the Employment Cost Index for Q3 will provide policymakers with valuable information on price pressures. We also get the Conference Board Consumer Confidence.
Overnight, we will look to China’s Caixin manufacturing PMI. The similar official measure came in lower than expected this morning at 49.5 in October (consensus 50.2).
The 60-second overview
Bank of Japan. The Bank of Japan (BoJ) tweaked its Yield Curve Control (YCC) policy at a meeting that ended this morning, redefining the 10-year rate ceiling as a reference rather than a rigid bound, and thus removing a pledge to defend that level with offers to buy unlimited amounts of bonds at the 1% level. News of a change in the YCC moved the USD/JPY from 149.7 to 149.0 yesterday.
This morning, the markets sold the fact again on the announcement and traded the cross back to 150. JGB yields sold off and 10yr yields are now trading 5bps closer to the 95bp cap. In our view, this was another, probably the last, step before the YCC is removed altogether. However, the BoJ still needs confirmation that inflation has moved sustainably above the 2% target before they are ready to take major steps towards normalization.
They are starting to realize that higher inflation is not temporary, and have raised their inflation forecast significantly, especially for fiscal 2024 (starting in April) to 2.8% from 1.9% in July.
European data softening. Inflation figures from Spain and Germany released yesterday came in below expectations, pointing to softening inflation across the eurozone. Germany’s seasonally adjusted HICP fell 0.2% m/m in October, while Spain’s HICP pace halved to 0.3% from 0.6% in September.
Core CPI details were also generally weaker. Meanwhile, the first release of Q3 GDP data showed that Germany contracted by 0.1% q/q, highlighting the weakness of economic growth in the region. According to the Federal Statistical Office, private consumption was the main drag on growth, while investment in equipment and machinery showed some improvement.
UAW strike ends. Yesterday, GM and the United Auto Workers (UAW) reportedly reached a tentative agreement to end a six-week strike. GM has agreed to raise hourly wages by 25% over the course of a four-year contract, which is very similar to the terms of the contracts reached by Ford and Stellantis last week. If ratified by the UAW, it will mark the end of the first coordinated strike at the three largest U.S. automakers.
Stocks: What better way to start the week than with a Monday rebound. There were no clear drivers behind the sudden optimism, other than the S&P500 entering correction territory on Friday. In fact, US yields actually rose during the session. While the Nordic and European session was modest (Stoxx 600 only up 0.4%), the US rally was strong. The Dow closed up 1.6% and the S&P 500 up 1.2%.
Cyclicals led the way, with banks and communications among the better performers. Sentiment is souring in Asia this morning after weak Chinese PMIs and the Bank of Japan abandoning yield curve control. Chinese stocks are down almost -2%, but Japan is up 0.5%.
FI: EGB yields fell slightly yesterday as weaker than expected inflation numbers from Spain and Germany provided some support to the segment. However, the rally was largely reversed in the afternoon. 10Y Bund yields ended the day 1bp lower, while 10Y BTP yields fell 7bp. Markets are now pricing in 82bp of ECB cuts next year, up from 66bp before last week’s ECB meeting.
The long end of the UST curve was supported to some extent by the downward revision to the US Treasury’s expected net borrowing through the end of the year (see FI section). The BoJ’s decision to soften its YCC policy put upward pressure on long JGB yields this morning, with the 10Y tenor rising 5bp to 0.95%.
FX: EUR/USD is zigzagging around 1.06 while USD/JPY is back above 150 on the BoJ’s YCC tweak. Scandies continue to trade weaker in tandem with NOK/SEK at 1.00. Brent oil is back below USD 90/bbl after a 3% drop yesterday.
Credit: Credit spreads tightened slightly yesterday with the iTraxx Xover tightening 4.8bp and the Main tightening 0.9bp. There was little activity in the primary market, but SEB saw solid demand for its EUR500m 5y green SNP offering, which attracted orders of over EUR2bn.
Nordic Macro
Riksbank Governor Thedeén spoke in New York last night and repeated the message that the repo rate will remain “high for a long time”, whatever the Riksbank decides at the November meeting. He expressed concerns about the weak SEK and service prices making inflation “sticky”.
But this is nothing new. We note that the current SEK weakness in KIX terms is just about average for the 15 years of SEK depreciation between 1993 and 2022, so 2023 is nothing special. Nor did he mention the Riksbank’s semi-annual business survey, which suggests that companies close to households are planning to cut prices. For the time being, we are sticking to our guns of no hike in November.
