The combined pushback trimmed the October

KBC Market Research Desk KBC Bank

Markets

Bond markets were wildly volatile yesterday. They hit new key milestones at first (eg. UK30-yr 6% and 24-yr highs in the US10-yr & 30-yr). Then news of a potential diesel emergency reserve release in Europe (at US request) prompted an intraday reversal, but one that didn’t last. Deep into European and early in US dealings, bond yields started crashing – though not everywhere. Net daily changes varied between -9.6 (2-yr) and -1.6 bps (30-yr) in the US. German yields dropped 4 to 14 bps in bull steepening fashion. The front end received support from a growing number of central bankers pushing back against back-to-back hikes. It started with ECB president on Monday, who referred to the sharp uptick in long-term bond yields as restraining the economy and reducing the need for tightening. NY Fed Williams on Wednesday said there’s no urgency for action after September’s move. Dallas Fed Logan, among the FOMC’s fiercest hawks, yesterday suggested the Fed could remove the three insurance cuts of last year but her comment on higher term premiums echoed Lagarde. Fed vice chair Jefferson and vice chair for Supervision Bowman, also yesterday, both said they’d need more time before deciding whether additional hikes are needed. The combined pushback trimmed the October hiking odds to below 30% for the Fed and just 20% for the ECB and strengthens our view of front-end yields having hit a(n at least) short-term ceiling. European inflation figures and the US payrolls report today serve as the main challenges to that view oday. The former is expected at 3.7% for headline and 2.5% for core. Our in-house KBC nowcast stands at 3.63% and 2.33%. Seeing the national inflation numbers, risks are clearly tilted to the upside. The US payrolls report is expected to show 90k employment gains with the unemployment rate steady seen at 4.1%. In light of the recent Fed speak, we consider the market risks now more balanced. A downside surprise could now in fact extend the correction in short-term yields. More (dovish) central bank talk planned today could do the same.

Turning to the long end of the curve. USTs and Bunds showed early signs of technical exhaustion moves with potential for short term consolidation/correction. That turns attention to intra-EMU sovereign rates. Spreads vs swap in French OATs, Italian BTPs and Belgian OLOs all finished at the days’ highs, respectively at 130 bps (record), 108 bps (1.5 yr high) and 77 bps (14-yr high). That reveals underlying fiscal stress as the dominating market theme. The poor performance on European stock markets adds to the case. We believe the topic could stay at the center of attention at least for the remainder of the year. That’s bad news for the euro. The common currency tanked to its weakest level since May ’25 against the USD at 1.1215. EUR/USD eventually closed at 1.1244 but that didn’t prevent the technical picture from weakening dramatically. Downside potential stretches towards the 1.11(11) area. Euro weakness is the name of the game, also against GBP. We keep a close look at EUR/CHF for further credit risk stress.

News and views

Price growth in the Japanese capital accelerated in September as fiscal support measures expired. The end of a water charge waiver pushed utility prices 3.8% higher M/M and Y/Y and added around 0.25 ppt to inflation. Childcare fees lifted the figure even slightly more as last year’s waiver for firstborns created a low base. Overall, headline inflation increased by 0.1% M/M to be up 2.7% Y/Y (from 1.8% and against 2.5% consensus). Core inflation, ex fresh food and energy, increased by 0.4% M/M and spiked from 2% Y/Y to 3% (vs 2.5% consensus). Higher leisure prices contributed as well with holiday demand spiking during a five-day holiday period. The effect might fade next month. Today’s “price reset” will keep pressure on the Bank of Japan to act to upside inflation risks with underlying inflation hovering above its 2% policy target. Japanese money markets attach a 90% probability to a next rate hike (to 1.5%) at the December policy meeting. The expected policy rate peak is situated at 2% in 12 months’ time.

Hungary’s manufacturing sector expanded at a faster pace in September, with the seasonally adjusted PMI rising to 53.2 from 51.5 in August (vs 51.5 consensus), signaling stronger growth in activity. Nine of the survey’s key indicators remained in expansion territory, supported by higher new orders, production and export demand. New orders strengthened significantly, with the index rising 4.5 points to 59.0, while the production index increased 2.4 points to 55.0. Export demand also improved, with the export index climbing to 60.2. Employment conditions remained modestly positive, with the employment index edging up to 50.6. However, cost pressures intensified, as the purchasing prices index rose to 60.4, indicating continued increases in input costs.

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KBC Market Research Desk

KBC Bank

KBC's Market Research Desk publishes a number of short-term reports.

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