Markets
UK gilts underperformed German Bunds and US Treasuries today. Fitch’s decision to downgrade the country’s AA- rating outlook from stable to negative sparked the move. The rating agency cited heightened fiscal risks stemming from the government’s lavish spending plans. UK yields add 10.2 basis points (2 years) to 14.3 basis points (30 years), with very long-term intraday momentum suggesting some interference from the Bank of England. The British Pound underperformed slightly with EUR/GBP setting and an intraday high near 0.8790 from an open at 0.8720. Variations in US yields vary between -0.2 bps (30 years) and +2.3 bps (5 years). It’s a relatively quiet day for US investors following the ISM and ADP data earlier this week. Weekly jobless claims rose slightly more than expected (190,000 to 219k), but remain near historic lows. Today’s US markets are clearly trading with tomorrow’s payroll in mind. The German yield curve steepens with rate variations between -2.5 basis points (30 years) and 4.7 basis points (2 years). There is still a strong outperformance of bonds relative to swaps. The European swap rate curve climbs up to 9.3 basis points upstream. The movements with shorter durations are not linked to the publication of the minutes of the ECB. On the contrary. Yields temporarily fell as they revealed some officials were proposing a rate hike of 50 basis points instead of 75 basis points given recession risks. The general tone, however, remained more belligerent. Growth concerns should not prevent aggressive rate hikes. Even Chief Economist Lane warned that price pressures are likely to persist. The euro did not benefit from interest rate support with EUR/USD loses the big figure of 0.99 again and is currently below 0.9850. Global risk sentiment is gloomy European indices losing around 0.5% after a positive opening and the UK FTSE underperforming (-1%). Yesterday’s big OPEC production cut is getting a lot of attention, but Brent is trading flat at around $93.25/bbl. The commodity rallied in the days leading up to the decision amid rumors of a production cut of 2 million bpd.
News headlines
The dynamics of retail sales in Hungary and the Czech Republic are deteriorating quite sharply. Czech statistical offices reported that retail sales (in real terms) in August fell 0.7% M/M or 8.8% less than the same period last year. Sales (real) of non-food goods decreased by 10.3% year-on-year, sales of motor fuels decreased by 9.2%. Actual food sales were down 6.6% from a year ago. In a comment, the CZSO said sales fell in all categories except pharmaceuticals, medical and orthopedic products. Retail trade in Hungary also slowed significantly more than expected to 2.4% Y/Y from 4.3% Y/Y in August. Food sales fell 2.4% year-on-year. Non-food sales increased slightly (+0.5%). Automotive fuel sales increased by 18.4% compared to the same period last year. The data suggests that domestic demand in both countries is slowing. The Czech central bank and the Hungarian central bank will take this into account when assessing the balance between supply and demand in their economies as they seek a deceleration in price growth.
In a letter to the Chairman of the UK Treasury Committee, BoE Deputy Governor for Financial Stability Cunliffe provided an explanation for the Bank unusual market intervention as the BoE rolled out a £65bn program to stabilize the long-dated gilt market last week. The letter describes how this market became destabilized after the announcement of the Mini budget by Treasury Secretary Kwarteng on September 23. In particular, the likelihood that liability-driven investment funds (LDIs) which are used by pension funds would be forced to sell more huge amounts of long-term gilts, forcing the BoE to intervene. The BoE has also made it clear that the program aimed solely at restoring financial stability. The “the operations are not intended to create lasting central bank money, nor to cap or control long-term interest rates”. Once the buying program is over and the risks to market functions are judged by the BoE to have diminished, the operation will proceed in a smooth and orderly manner.
