In the Euro-Zone, we get the September PPI figures. Producer prices have been falling like a rock this year after last year’s sharp increases. In August, the index fell 11.5% and the consensus is for a further decline to 12.5% y/y in September.
In Germany, industrial production figures for September are due. The numbers will be interesting as GDP fell less than expected in Q3. If industrial production comes in weaker than expected, Q3 GDP growth could be revised slightly lower.
The 60-second review
Fed SLOOS: The Fed’s Q3 Senior Loan Officer Opinion Survey (SLOOS) showed that a slightly smaller share of U.S. banks reported tighter lending standards for commercial and industrial (C&I) loans compared to Q1 and Q2. Similarly, fewer banks reported weaker demand, although the share of banks reporting a pickup in loan demand also remained low.
Lending standards for commercial real estate (CRE) loans continued to tighten, as was the case for most consumer loans. Overall credit conditions remain clearly restrictive, although the pace of tightening is moderating toward the end of the federal funds rate hiking cycle. As financial conditions continued to tighten over the survey period, a growing number of FOMC participants have now signaled that rate hikes are likely over.
Last night the Fed’s Lisa Cook echoed her colleagues’ recent comments, saying that she “hopes that current policy settings are restrictive enough.
RBA: The Reserve Bank of Australia (RBA) raised the cash rate by 25bp to 4.35% this morning, after four consecutive holds in previous meetings. The decision followed an upside surprise in Q3 CPI, and the RBA saw sticky services inflation in particular as increasing the risk of more persistent price pressures than anticipated.
Nevertheless, its forward guidance was slightly more dovish than before, as the statement no longer indicated that “further tightening may be needed”. The door to a policy rate hike remains open, but given the recent tightening in global financial conditions, we think the RBA is likely to remain on hold from here.
The hike was widely expected by the consensus and largely priced in by the markets ahead of the meeting, and the initial AUD/USD spike faded quickly. We still maintain a bearish forecast profile for the cross in the 12m horizon (0.62).
China: Overnight international trade data for October was a mixed bag. Imports rebounded more than expected (+3.0% y/y, consensus -4.8%), which could indicate that recent policy easing is supporting domestic demand. In contrast, exports fell more than expected (-6.4% y/y, consensus -3.3%) as tighter financial conditions curb demand elsewhere. Overall, the trade balance weakened, with the surplus falling to USD 56.5 bn (from USD 77.7 bn).
Equities: Global equities were higher yesterday as last week’s optimism continued. However, the move in yields yesterday was not the driver of the optimism, but rather the expectation that the peak in yields is behind us. It is interesting to see in surveys how investors are becoming less fearful of inflation each month (Sentix yesterday).
Yesterday’s yield reversal created headwinds for REITs and small caps, while the massive underperformance of defensives that we saw last week paused. In the US, Dow +0.1%, S&P 500 +0.2%, Nasdaq +0.3% and Russell 2000 (1.29%). Sentiment in Asia is much sourer this morning as volatile Chinese export data undermines. European and US futures are also lower.
FI: European yield curves steepened from the long end with 30y Bunds up 9bp on the day. This follows last week’s pullback in yields, especially after Wednesday’s FOMC meeting. The move was mostly seen in the cash bond space, with EUR swap rates only partially following the move.
The 10y Bund ASW spread tightened by 2.7bp to 52.9bp, a level not seen since early 2022. ECB‘s Holzmann tried to push back the dovish pricing in the markets as he said that the ECB should be ready to hike if needed. He also said that QT will not come this year via the end of PEPP reinvestments. In the midst of this, real rates were slightly lower on the day.
FX: The G10 FX market digested last week’s data and Monday’s big central bank meetings. The CHF, USD, and EUR posted small gains against the JPY, AUD, NZD, and CAD. EUR/USD traded above 1.07 and USD/JPY traded below 150.
Credit: Secondary credit markets had a relatively uneventful day with muted activity. iTraxx Main was 1bp wider at 78bp while iTraxx Xover widened 5bp to 418vp. On a positive note the primary market activity was relatively high with a number of new issues – among others from Danone, Suez SACA and EPH Financing International. Furthermore, we saw financial issuance from the likes of Danske Bank, BNP Paribas SA, Deutsche Bank and Swedbank. Overall issuers took advantage of slightly improved market conditions and a clearer calendar to come to the market.
Sweden: The SNDO publishes October figures for the Swedish budget balance (CET 8:00). Their own forecast from two weeks ago indicates a deficit of SEK4bn for the month. The 2023 full-year forecast was revised higher to a surplus of SEK31bn, up from a deficit of SEK15bn.
For the coming two years the SNDO expect a deficit of SEK 49bn and SEK 60bn, respectively. Deputy Governor Martin Flodén will discuss the Riksbank’s view of the economy and work on monetary policy in a troubled world tomorrow at CET 15:10.