The debate on the pace/timing of follow-up BoE easing is again open
|Markets
UK inflation data illustrated yesterday that market-/policy relevant data still have the potential to move markets. UK Gilts decisively outperformed Bunds and Treasuries after less worse than feared UK September inflation data. UK headline inflation at 3.8% avoided a spike toward the 4% psychological barrier. The core measure even unexpectedly eased to 3.5% from 3.7%. Gilt yields declined between 9.1 bps (2-y) and 4.5 bps (30-year). The debate on the pace/timing of follow-up BoE easing is again open. Markets see a chance of about 70% for a December rate cut. The odds for a November cut rose from 10% to about 1 in 3. We assume it might be a closer call, subject to the BoE’s assessment of the content of the new policy report that accompanies the November decision. Admittedly, recent BoE worries on financial stability and leverage in some parts of the financial system to some extent also might play in the background. Lower inflation might be relatively better news for the UK budget via (inflation-linked) interest rate payments and expenses. This probably helps to explain the rather orderly market reaction of sterling to the loss of interest rate support. After an initial spike from the 0.8675 area to 0.8710, EUR/GBP finally eased back just below 0.87. (close 0.869). US and EMU markets didn’t ‘enjoy’ this kind of market relevant data releases. The risk rebound since last week’s (trade/credit-related) noise finally ran into resistance with US equity indices easing between 0.53% (S&P) and 0.93% (Nasdaq). Moves in US and EMU German bond markets this time were limited. US yields declined marginally (1 bp across the curve). A $13bn 20-y US Treasury auction met decent investor buying interest. German bonds took a breather after their recent rally with yields ‘rising’ between 0.1 bp (2-y) and 1.9 bps (30-y). The oil price jumped about $3/b as the US announced sanctions against two Russian oil majors (cf infra). However, the direct impact on bond and FX markets was limited. Following an initial gain, DXY closed the session marginally lower at 98.9. EUR/USD ‘gained’ to close at 1.1611 compared to 1.1600. A Similar insignificant move for USD/JPY (close 152).
Most Asian equity markets are trading with a risk-off bias this morning. Headlines that the US is considering broad export restrictions on China with respect to critical software again rekindles trade uncertainty. Markets also still might assess the broader impact of the US sanctions against Russian oil majors. Regular US data publications will again be limited. An EU summit in Brussels plans to address a wide range of topics ranging from the response to the war in Ukraine, over EU defense, the situation in the Middle East, competitiveness, housing and migration,... However, it is far from sure the debate will yield any direct input for markets. We look out whether a (mild) risk-off supports further gains in core bonds. For now, the dollar at least shows no unequivocal reaction function.
News and views
The US imposed further sanctions on Russia yesterday as a result the country’s lack of serious commitment to a peace process to end the war in Ukraine. The actions target Russia’s two largest oil companies, Rosneft and Lukoil. The US increases pressure on Russia’s energy sector to degrade the Kremlin’s ability to raise revenue for its war machine and support its weakened economy. The sanctions freeze all US-based assets of both oil companies and their subsidiaries and prohibit US persons from engaging in financial transactions with them. Last week, the UK unleased strongest sanctions yet on Russia by also directly targeting both oil majors. The EU is set to announce its 19th package against Moscow, including a ban on imports of Russian LNG. Oil prices rose after the announcement with Brent crude moving from $62/b to $65/b..
The Bank of Korea kept its policy rate unchanged at 2.5%. The central bank maintained its growth forecasts at 0.9% for this year and 1.6% for next while inflation is expected to stay anchored near the 2% target. The central bank kept its easing bias going forward with 4 out of 7 board members leaning to a 25 bps rate cut in the next three months while 2 preferred a steady course because of rising financial stability risks linked to the hot (Seoul) housing market. Previously, the split was 5-1. BoK Rhee doesn’t disclose his own views. The Korean won weakens this morning against an overall firm dollar with USD/KRW touching 1440 for the first time since May.
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