Sunset Market Commentary – Forex Stock
A halt in forex markets, minor gains in equity markets and technical corrective actions in European bond markets conclude today’s action. The ecological calendar was empty outside of the final EMU PMIs, leaving a void between yesterday’s good US manufacturing ISM (60.8 vs. 61.1) and tomorrow’s ADP job, the non-manufacturing ISM and the Fed meeting. With the latter, we have arrived at the main reason for inaction today. Investors will not place any additional directional bets until this elephant leaves the room. Fed Chairman Powell will give the final green light to curtail asset purchases, but the pace and timing have already been set. Asset purchases will be reduced by $ 15 billion on a monthly basis (10 billion treasury bills and 5 billion MBS) to stop by June of next year. The absence of new growth and inflation forecasts and an updated scorecard leaves investors guessing when a first rate hike will take place. Fed Chairman Powell will not commit to tackling this thorny issue. The September SEP showed that Fed governors were divided over whether to start the bull cycle as early as next year. Money markets are already positioned more aggressively. The policy statement will be the only potential clue as to whether governors are reassessing the nature of the inflation spike. The official narrative so far indicates that high inflation largely reflects transient factors. Diluting “largely” or leaving aside the ephemeral reference, will not go unnoticed.
To summarize today’s action, we’ll start with the European bond markets. The German 10-year yield and the European 10-year swap rate failed to cross current year highs of -0.07% and + 0.3% respectively following the action from the ECB last week, prompting back action. German rates lost 5.1 bps to 7 bps in the 2-year-10-year segment with an underperformance of the very long end (flat). Trading at the very long end of yield curves remains very peculiar and often inexplicable in recent months. The underlying details show a pullback from last week’s sudden rise in real rates. The US yield curve steepens with yield variations ranging from -3.2bp (2yr) to 0.1bp (30yr), with the December 15 policy meeting being the most likely opportunity to give new guidance on rate standardization. The forex market is a sea of calm with EUR / USD changing sides around the big 1.16 figure. EUR / GBP shows a similar choppy trading pattern around the 0.85 grip, with investors eagerly awaiting Thursday’s verdict from the BoE. Markets and analysts are divided over whether or not the BoE will raise its key rate.
The next Czech government is unlikely to adopt the euro during its four-year term, Stanjura, the man expected to be finance minister for the new center-right coalition, said today. The five parties that form the coalition are generally in favor of the introduction of the euro, but have made it clear that it is not a priority on the agenda. Instead, they go focus on consolidating public finances after the ravages of the pandemic. Stanjura added that the long-held position has been and still is that the Czech Republic should only adopt the euro when it is in its favor, which has so far not been the case. The new Czech coalition seeks to prepare the government’s agenda and the distribution of ministerial jobs by November 8, when the new lower house of parliament meets for the first time.
Swiss inflation accelerated more than expected in October, going from 0.8% year-on-year to 1.3%. It is the fastest pace since 2010, matching the speed of 2018. Core inflation remained subdued at 0.6%. The Swiss statistics office said oil, gas and fuel saw prices increase while the prices of salads and fruit vegetables fell. The acceleration in price developments should not worry the SNB as (core) inflation is still far from the 2% target. The notoriously strong Swiss franc also serves as an anti-inflationary factor. EUR / CHF recently slipped below 1.06 and approached levels seen at the height of the pandemic. The currency pair is now trying to regain some of the lost ground.