The new trading weeks kicks off today with a series of central bank speeches

KBC Market Research Desk KBC Bank

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A phone call between US president Trump and his Chinese counterpart Xi Jinping supported the bulls on Friday. The sale of TikTok’s US operations to an American company was the main point but Trump said both made progress on a variety of issues including “Trade, Fentanyl, the need to bring the War between Russia and Ukraine to an end”. The US president added that he would meet Xi in person on the sidelines of the upcoming Asia-Pacific Economic Cooperation summit. The main indices on Wall Street all hit new records. The US dollar extended its post-Fed rebound into a third day. DXY rose to 97.64, EUR/USD drifted gradually but steadily towards the mid 1.17-1.18 area. The dollar’s (for now still) minor comeback comes along with some short-term bottoming out of the 2-year yield. Net daily changes in US rates on Friday varied between 0.8-2.2 bps. German bonds slightly underperformed. Intra-EMU spreads narrowed. France’s 10-yr yield (and therefore spread as well) finished the week the way it started: slightly higher than Italy. The remarkable swap has been years in the making. Italy’s rating upgrade (see below), along with southern peers including Portugal and Spain, are testament to the changing fiscal pecking order. Gilts were the laggards. The long end of the UK curve was particularly vulnerable (30-yr +5.2 bps). August budget deficit figures came in much higher than the Office of Budget Responsibility expected. This independent budget watchdog assesses the government performance against its self-imposed fiscal rules so Friday’s numbers are yet another blow for UK finance minister Reeves going into November’s Autumn Budget. Sterling was among the weaker performers with EUR/GBP closing north of 0.87 for the first time since early August. Cable (GBP/USD) forfeited the 1.35 handle.

The new trading weeks kicks off today with a series of central bank speeches, ranging from Bailey and chief economist Pill in the UK over ECB’s Lane and Nagel in the euro area to several Fed members (NY’s Williams, board member Miran) that are to address the economy and monetary policy. PMI’s are scheduled for release tomorrow along with Fed’s Powell offering his view on the economic outlook. PCE deflators, the Fed’s preferred inflation gauge, are printed on Friday. A slew of central bank meetings are scattered across the week with Hungary and Sweden on tap Tuesday, the Czech Republic Wednesday and Switzerland the day after.

News and views

Rating agency Fitch raised Italy’s credit rating from BBB to BBB+ with a stable outlook. The upgrade reflects increased confidence in Italy’s fiscal trajectory, a stable political environment, ongoing reform momentum and reduced external imbalances. Fitch expects a continued gradual deficit reduction in 2025-2027, supported by structural improvements on the revenue side and strict expenditure control. They expect a deficit ratio of 3.1% of GDP, below the official 3.3% target. The government’s aim is bring it down to 2.6% in 2027 and under 2% by 2029. The primary surplus is expected to rise from 0.7% of GDP this year to 2.4% in 2029, supported by reform implementation. Fitch forecasts the debt ratio to increase modestly from 135.3% of GDP to 137.5% in 2026, before falling back towards 134% by 2030. One of Italy’s weaker points remains its low growth potential. The rating agency estimates growth of 0.6% this year and an average of 0.8% in 2026-2027. Domestic demand, particularly investment, will be a key driver of short-term growth, offsetting weakness in the external sector. Italian BTP’s have been performing strongly this year with the 10y swapspread narrowing from a YtD top at 130 bps to 83 bps currently and trading more and more in line with semi-core peers.

RBA governor Bullock sounded slightly more hawkish this morning in a testimony to the House of Representatives Standing Committee on Economics. Inflation has fallen substantially since the peak of 7.8% in 2022 and is now within the 2-3% target range. Labour market conditions are close to full employment. Since the August meeting, domestic data have been broadly in line with the Australian central bank’s expectations or if anything slightly stronger. The Board will discuss this and other developments at their meeting next week. Markets expect a stable policy rate (3.6%), but slightly reduced bets on a final rate cut at the November meeting (75% from 95%). Australian bond yields add 3-4 bps across the curve this morning while AUD/USD treads water.

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