The ADP job report serves as an appetizer for Friday’s Payrolls

Markets

UK gilts underperformed yesterday. Yields with maturities ranging from the 2-yr (+5.1 bps) to the 10-yr (+6.1 bps) all hit five month and post-election highs. The spring Budget, due to be presented later today, is a key moment for the new Labour government and for markets. UK debt sales are expected to rise to the second-highest on record (£300bn) this year, trumped only by the pandemic-stricken years. This time, however, there’s no central bank buying bonds en masse, on the contrary. Labour needs to plug a £40bn hole and wants to invest in infrastructure and public services. With taxes already headed to their highest in decades, cutting expenditures (which usually enjoys little political appetite) and borrowing are the remaining options. By broadening the definition of “debt”, Chancellor Reeves created some £50bn additional borrowing room for future years without breaching the long-term debt reduction targets. Markets are on edge and rightly so. Expansionary fiscal policy may limit the central bank’s ability to cut rates. Sterling welcomes the (front end) interest rate support for now but we doubt whether that’s also going to be the case if rising (credit) risk premia take over at the long end of the curve. EUR/GBP tested 0.83 support yesterday; GBP/USD settled back above 1.30. German rates rose a couple of basis points too, from 3.4-5.7 bps. UST’s parted ways. Yields whipsawed on weaker JOLTS and stronger US consumer confidence before a smooth $44bn 7-yr auction (contrasting with the 2-yr and 5-yr one) settled the debate. Net daily changes varied between -2.8 bps to -4.3 bps. EUR/USD 1.076-1.0778 support lived to fight another day. Strong after-market results from Alphabet and reports of additional Chinese stimulus – likely to be announced at a top meeting next week – failed to inspire Asian trading this morning. Japan is an outlier with recent JPY weakness (USD/JPY 153.4) being the driver of current stock outperformance (+0.5-1%). Q3 GDP growth and inflation features the agenda today. The amount of data may trigger intraday FI and FX volatility but makes directional calls tricky. We expect in any case to see ongoing divergence between the US and Europe with the former growing triple the speed of the latter (2.9% q/q annualized vs 0.2% q/q). The split within the euro area between the ailing core (Germany) and outperforming periphery (Italy, Spain) will most likely deepen. First national CPI prints are due in Germany, Belgium and Spain while the US publishes Q3 PCE deflators. The ADP job report serves as an appetizer for Friday’s payrolls. Both are expected to reflect a significant hurricane-related impact. More tech giants including Microsoft and Meta Platforms report after market.

News and views

Headline Australian inflation rose by 0.2% Q/Q in the July-September quarter, down from a 1% Q/Q pace in Q2 and printing slightly below consensus (0.3%). Inflation slowed from 3.8% to 2.8% in Y/Y-terms, moving within the Reserve Bank of Australia’s 2-3% inflation target band for the first time since Q1 2021. While prices continued to rise for most goods and services, these increases were offset by large falls for electricity (-17.3%) and automotive fuel prices. (-6.7%). Without rebates (2024-2025 Commonwealth Energy Bill Relief Fund & state-specific discounts) electricity prices would have increased by 0.7% Q/Q. The decline in annual goods inflation from 3.2% Y/Y to 1.4% Y/Y was also down to electricity and gas prices. Annual services inflation rose from 4.5% Y/Y in Q2 to 4.6% Y/Y. Higher prices for rents, insurance and child care were the main contributors. Underlying core measures, like the trimmed mean which filters for the biggest price swings, also point to more stubborn price pressures, keeping the Q2 pace of 0.8% Q/Q in Q3 and only slowing from 3.9% Y/Y to 3.5% Y/Y. Today’s numbers warrant the RBA’s current higher-forlonger approach, suggesting that a first rate cut will effectively only be for Q2 2025. AUD/USD abides by the rules of USD-strength this month, dropping back from 0.69+ end Q3 to 0.6550 currently.

The EU is walking the tariff talk against Chinese electric vehicles. Brussels yesterday announced levies that will come into force today and last for five years. The new duties come on top of an existing 10% tariff on Chinese car imports to the EU. Extra tariffs depend on the manufacturer and range from 7.8% to 35.3%. Earlier this year, the US raised tariffs on Chinese EV’s to more than 100% citing extensive government subsidies. The EU’s decision risks triggering retaliation on goods ranging from dairy over pork and brandy to cars with large engines. The latter could be increased from the current 15% to 25%.

Download The Full Sunrise Market Commentary