KBC Sunset Market Commentary 11/10/2022 via Trader Talent

• And there is the Bank of England again. Just yesterday, it announced additional measures to support market functioning. In a statement today, the UK central bank widened the scope of its emergency gilt purchase operations to include index-linked government bonds. “…, the beginning of this week has seen a further significant repricing of UK government debt, particularly index-linked gilts. Dysfunction in this market, and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.”, it said. The BoE commits half of the recently boosted daily maximum (£10bn). The news comes after yields on inflation-linked gilts (= real yields) shot up between 59.7-76.4 bps across the curve yesterday. As these real yields are tied to monetary policy expectations and risk premia, it’s clear that those sharp moves have Chancellor Kwarteng’s £45bn minibudget written all over it. Gilt buying, both conventional and inflation-linked, are still scheduled to end this Friday. But some believe the BoE will be forced to delay its QT plans for a second time given the markets’ stress level. For today, some relative calm has returned to the UK. Gilt yields ease between 2.6 and 6.2 bps in a steepener. The ultralong end, the focus of the BoE interventions, underperforms (+3.8 bps). Inflation-linked bond yields drop 17.6 bps at the front but add a few bps still further out. Sterling holds fairly steady, both against the euro and the dollar. EUR/GBP sticks south of the 0.88 border while cable (GBP/USD) tested but bounced of 1.10 support (1.108 currently).

• Other markets trade fairly quiet, killing time in the run-up to US CPI numbers on Thursday. The escalation in the Ukraine war is grabbing some headlines again and keeps sentiment below zero. The IMF cutting the 2023 world GDP outlook and warning that the worst is yet to come obviously isn’t helping either. European stocks shed 0.5%, though losses were almost triple that in the first half of the session. WS opens with losses up to 1%. The S&P500 risks losing the previous YtD low. European yields don’t build on yesterday’s late-session momentum. German rates ease 1.5-3 bps across the curve. The US curve steepens with the long end underperforming (+3.5-6.5 bps) the front (-1.5 bps) in a catch-up move. Key technical levels (e.g. 4% in US 10y) were tested but survive for now. The dollar fluctuates around opening levels. EUR/USD trades around 0.97, the trade-weighted USD is flipflopping around 113.

News Headlines

• Czech inflation accelerated from 0.4% M/M in August to 0.8% M/M in September with the headline number picking up more than forecast from 17.2% Y/Y to 18% Y/Y. Core inflation did not increase further, but remains high at 14.7% Y/Y. Monthly dynamics were mainly influenced by prices of “housing, water, gas, electricity and other fuels”. Prices of goods in total went up by 1.5% M/M (20.7% Y/Y) while prices of services dropped by 0.3% M/M (13.7% Y/Y). The Czech National Bank commented on the inflation release. They point out that the Y/Y increase in consumer prices in September was more than two percentage points smaller than expected in the CNB’s summer forecast (20.4% Y/Y). Underlying dynamics strengthen their view this could be the peak. A moderation of price growth will be fostered by an easing of the dynamics of production costs, a decline in households’ purchasing power, and the stabilizing effect of the previous monetary policy tightening helping to cool domestic demand. Czech swap yields nevertheless follow the global trend higher, adding 10+ bps across the curve. Money markets still take into account one final fine-tuning hike from the CNB (+25 bps) despite the status quo of the past two months at 7%.

• Hungarian inflation surged by 4.1% M/M to 20.1% Y/Y (from 15.6% Y/Y) in September. Changes in regulation for household utility prices pushed the cost of electricity, gas and other fuel significantly higher. Core inflation nevertheless also surged to 20.7% Y/Y. The Hungarian swap yield curve turned more inverse with yields spiking 20 bps (20-yr) to 50 bps (2-yr) higher. The forint sets an all-time low at EUR/HUF 430. Will the MNB be able to stick to its view that 13% is the policy rate peak? Money markets don’t think so and discount at least another 200 bps of tightening.