This week's main dish is reserved for European CPI numbers

Markets

The European September PMIs of last Friday suggest a 0.4% economic contraction in the running quarter but they came with a minor silver lining. The destocking process in manufacturing could bottom in the next couple of months, paving the way for a recovery in the sector. Services is typically lagging behind and showed new orders and business shrinking at a faster pace but at least companies keep hiring for the time being. Especially important for the ECB is that input price pressures intensified again. European yields whipsawed, driven by diverging national readings from France and Germany at first. German yields eventually closed the day marginally higher between +0.1 (2-y) and 2.3 bps (30-y). US Treasuries outperformed. PMIs in the country showed a similar dynamic: slowing services and tentative bottoming out of the manufacturing sector. After the beating earlier in the week, markets swooped up some Treasuries going into the weekend. Speeches by Fed’s Collins and Bowman capped gains at the shortest end of the curve. The latter revealed her 6-6.25% 2024 rate projection in the dot plot by saying there may be more rate hikes (plural) needed. Yield changes varied between -3.4 (2-y) to -6.3 bps (5-y). The 10-y yield eased after hitting 4.5% intraday for the first time since 2007. With stocks under marginal selling pressure, the dollar gained. DXY rose above 105.38 resistance (closed at 105.58). EUR/USD for a second day straight dropped below the May 1.0635 support before paring losses to 1.0653. USD/JPY closed at the highest level since November last year (148.37) with the yen under pressure from the BoJ’s status quo. UK retail sales and PMIs missed the bar, hurling EUR/GBP towards the 0.87 big figure. GBP/USD (1.2241) extended losses after losing the May support (1.2308) a day earlier.

Last week was jampacked with central bank meetings. Attention this week shifts towards Central-Europe where the Hungarians (Tuesday) and Czechs (Wednesday) decide over monetary policy. It’s their first meeting since Poland’s shocker 75 bps cut. There’s a wide array of economic data including the German Ifo, US consumer confidence and durable goods orders. The main dish, however, is reserved for European CPI numbers on Thursday and Friday. The PCE deflator is due in the US at the end of the week. Given the backloaded nature of the calendar we expect a slow, technical start of the week that gives the dollar a slight edge over peers on the FX market. Yields could consolidate around current levels. They already powered through to new cycle highs in the US, both nominal and real. We’re keen to see whether September CPI numbers will do the trick for Germany. The 10-y real yield is nearing the topside of a (yield) bullish triangle.

News and views

Comments from the Hungarian Economic Development Minister, Marton Nagy, on Friday suggest ongoing tensions between the government and the Hungarian National Bank (MNB) on the execution of monetary policy. According to the Minister, the MNB keeping a focus on having a positive real yield to defend the currency might slow growth and consumption. Boosting domestic demand/consumption via VAT revenues for the government is important to improve the budget balance Nagy indicated. The comments come as the central bank on Tuesday is expected to reduce the overnight deposit rate from 14% to 13% to bringing it in line with the 13% standing policy rate. However, further rate cuts later this year could be slower as the MNB will look for a sustained further decline in inflation. Nagy also suggested that the central bank could consider raising its 3.0% inflation target, allowing it to ease policy further than is the case under current regime.

The Australian government on Friday reported a budget surplus of AUD 22.1 bln for the previous fiscal year. The surplus was equal to 0.9% of GDP. The government cited low unemployment and high commodity prices as important factors behind the budget surprise. The Australian budget showed deficits in the previous 15 year. However, the government doesn’t expect a new budget surplus this year due to a less positive economic environment in China and higher interest rates weighing on domestic growth. Today, the government also is expected propose a paper that will set a new objective for full employment. This broader definition is expected to focus more on underutilization in the labour market rather than on unemployment.

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