Markets

Markets

•          Yesterday’s violent and unexpected selloff at the very long end of global yield curves saw no follow-up action today with the exception of Japanese markets which still had to react. The Japanese 30-yr yield closed 7.2 bps higher at 3.3%, at least the highest level since the late 1990s since when data are available. The EU 30-yr swap rate and US 30-yr bond yield bumped into key psychological levels at respectively 3% and 5%. The overall conditions resulted in a more constructive risk climate with European equity indices recovering 0.5%-0.75% and EUR/USD changing hands near 1.1650. The UK 30-yr yield set a minor new high (since 1998) at 5.75% before retreating. UK Chancellor Reeves today set the date for a major showdown with markets. She commissioned the Office for Budget Responsibility to prepare and economic and fiscal forecast to be presented to parliament alongside the Budget on November 26. In order to stick to her self-imposed fiscal buffer measure and keep a grip on day-to-day spending, guestimates suggest up to £50bn in higher taxes or spending cuts. EUR/GBP holds just below the 0.87 big figure with the YtD top at 0.8769 being the next technical reference. Apart from the fiscal side, we expect the UK currency to suffer from Great Brittain’s stagflation context even if this implies a relatively restrictive monetary policy by the Bank of England. Several BoE members testified in front of UK parliament today. BoE Lombardelli expects UK inflation at 3.5%-4% for the rest of the year with increased risks of even longer persistence. She’s not even confident that policy is currently “meaningfully restrictive” with limited room to neutral in comments that are more hawkish than those of her colleague BoE Taylor. BoE Greene is on the same page as Lombardelli, seeing signs of a slowing disinflation process while being less concerned about lower demand than before. UK money markets only attach a 40% probability of another BoE rate cut before year-end. That’s slightly more than in Europe (1/3). Most ECB governors are pretty happy with the current monetary policy stance and don’t see big threats that could destabilize the current inflation convergence to the 2% target. Slovenian central banker Dolenc this morning even suggested that the next move could go in either direction. German ECB board member Schnabel yesterday also indicated no reason for further rate cuts at present while reckoning that rate hikes globally may begin sooner than currently anticipated. The ECB meets next week. Apart from an unchanged rate decision, the central bank will update its June GDP and CPI projections, but the outlook shouldn’t change much. Before the summer break, the ECB penciled in an average growth path of 0.9%-1.1%-1.3% for the 2025-2027 time horizon with inflation expected at 2%-1.6%-2%. 

•          Turkish inflation came in at the high end of expectations in August. Monthly price rises amounted to a little over 2%, matching the pace in July. Consensus anticipated a slight deceleration to 1.75%. The year-on-year number printed at or close to 33% for both headline and core inflation. Among the biggest contributors is housing (adding 8.1 ppts to the annual figure), food & non-alcoholic beverages (8 ppts) and transport (4.1 ppts). Turkish inflation has come a long way from the 80%+ levels seen over the last couple of years during the post pandemic recovery. But it remains a long way from the central bank’s (CBRT) 5% target over the medium term. The CBRT in its third quarterly inflation report presented mid-August doesn’t assume to hit it before 2028 with the 2027 forecast still being 9%. The above-expectations inflation numbers come after solid growth (driven by private consumption) numbers earlier this week and limit the central bank’s (CBRT) scope to further cut rates after last month’s outsized 300 bps move (to 43%). The CBRT meets September 11. The Turkish lira trades stoic around record lows.

•          The head of the Peterson Institute for International Economics (PIIE), an influential think tank, Adam Posen warned for the risk of a politicized Fed unwilling to lend dollars to foreign central banks in times of crisis. Posen referred to the US president’s Trump frequent attacks directed at the Fed and its chair in particular. Crisis episodes typically trigger huge global dollar demand, forcing central banks to tap liquidity lines at the Fed. With the risk of this option no longer being available, central banks including the ECB should pool their dollar reserves in order to provide emergency liquidity to domestic banks if needed.

Graphs

Japanese 30-yr yield responds to yesterday’s turmoil with new all-time high

Vix index (expected volatility S&P 500 in next month): unexpected weakness at long end of the curve spells trouble ahead

EUR/PLN: zloty going nowhere after NBP resumes rate cut cycle with 25 bps move to 4.75% 

EUR/GBP: once bitten, twice shy

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