Bonds stabilize ahead of US CPI as dovish Fed rhetoric weighs on the Dollar
Markets
Bonds are given some respite after their weeks long decline. US T’s took the lead in strengthening, primarily at the long end of the curve. Net daily changes in the 10-30-yr bucket varied between minus 3 and 4 bps. The front on an intraday energy/oil price rebound and dovish comments from Fed’s Williams. The influential NY Fed president thinks one final hike this year is appropriate. The economy is not overheating, Williams said, and underlying disinflationary forces remain which will pressure inflation towards 2% next year. The US 2-yr yield ended unchanged. Williams’ comments along with the additional ones from Waller yesterday (citing the impact of long-term bond yields) further raise the bar for today’s US CPI numbers. Any upside surprise would have to be material for markets to meaningfully reconsider an October rate hike. Consensus currently expects headline inflation to accelerate from 3.4% to 3.6% and core CPI from 2.4% to 2.5%. The European yield curve flattened in a similar way. Front-end underperformance here is tied to surging gas prices. The Dutch TTF future rallied to a new post-Iran war high of €87.22/MWh. It keeps the pressure on the ECB, though since Lagarde’s implicit pushback before the European Parliament end-September, money markets are not really considering any action later this month. Back then she referred to higher long-term bond yields doing some of the heavy lifting for the central bank. ECB chief economist Lane suggested the same yesterday as did the French central banker Moulin this morning. The ECB president did little to alter pricing during an interview on the sidelines of the IMF’s annual meeting in Bangkok this morning. She’s still not seeing any second- round effects showing up, but policymakers are extremely careful on the matter. Lagarde stuck to a “measured response” to the shock as the appropriate one. Belgian ECB governor Wunsch, also in Bangkok, said another rate hike is probable, without speculating whether that would be in October or December but not excluding anything.
The US dollar slid against the major peers in one of its worst days in around two months. EUR/USD recovered from the recently formed YtD lows around 1.1155 back towards the 1.12 big figure. DXY turned lower (102.18) after hitting a one-year high the day before. Barring the above-mentioned upside US CPI surprise, we could see some short-term consolidation in the US dollar happening. The parliamentary debate on the French budget remains a wildcard from the euro side of the equation, of course. USD/JPY closed lower, be it off the intraday troughs, around 158.33. The BoJ is rumoured to lean against a back-to-back hike in October and eye December instead. The euro couldn’t pull off any material gains against sterling though. EUR/GBP held steady around 0.845 with technicals looking weak. BoE’s Bailey in an echo to earlier comments mentioned yesterday that indirect and second-round effects remain subdued but that the longer the energy crunch persists, the harder it gets. The BoE governor last month said something similar about resisting pressure to raise rates. UK money markets fully discount such a move at the November 5 meeting.
News and views
Chinese headline inflation increased by 0.2% M/M and 0.9% Y/Y in September (up from 0.8%). Details highlighted the ongoing discrepancy between falling food prices (-1.7% Y/Y) and rising non-food prices (+1.5% Y/Y). Energy and the AI boom are lifting the latter. Core CPI, excluding food and energy, stabilized at 1% Y/Y. Chinese producer price inflation accelerated more than expected, from 3.8% Y/Y to 5% Y/Y (vs 4.4% consensus). It’s the fastest pace since June 2022 with again energy and IT equipment being responsible for the surge. September Chinese trade data showed both import and export growth accelerating, to respectively 31% Y/Y in USD terms and 36.3%. As a result, the monthly trade surplus widened to $133.5bn. In YtD-terms, the surplus is set to pass the $1tn mark this month for the first time since November 2025. Again, there’s a big divide between surging outbound high-tech shipments (almost half of total export growth) and other products.
A poll published by Swiss newspaper group Tamedia/20 Minuten ahead of a November 29 referendum shows a majority of Swiss citizens leaning against a VAT-increase to fund higher pensions. The proposed increase came after a 2024 referendum in favour to give pensioners a 13th monthly payment, starting December. A rejection of the VAT increase means that the Swiss government needs to get back to the drawing board to find a means to pay for the pension top-up.
Author
KBC Market Research Desk
KBC Bank
KBC's Market Research Desk publishes a number of short-term reports.
