Markets
Markets took a calm start to what could become an interesting trading week. Things kick off tonight with French PM Bayrou’s self-imposed confidence vote on his plans to tackle derailing public finances. While a defeat is market’s base scenario, a lot uncertainty remains on the way forward with all eyes directed at French president Macron afterwards. Will he put efforts in finding yet again a new “neutral” candidate to help overcome major ideological viewpoints in the hung parliament, ending in less fiscal discipline than proposed by PM Bayrou, or immediately throw the towel by calling early elections? Both scenarios suggest French assets will face continued pressure in the short term especially with the country’s credit rating at risk on Friday (AA- with negative outlook) of falling into single A category for a first time (Moody’s Aa3 stable, S&P AA- negative). Tomorrow’s key talking point will be the US Bureau of Labour Statistics’ preliminary benchmark revision to the establishment survey data for the 12 months through March 2025. Using more comprehensive data from the Quarterly Census of Employment and Wages, the BLS revises job data with final revisions due in March of next year. Markets anticipate significant downward revisions in line with last year when the job numbers in the 12 months to March 2024 were downwardly revised by 818k mainly because of issues with the birth-death model of companies and undocumented immigration. A significant revision might push US money markets into attaching a larger probability to a 50 bps Fed rate cut next week as it confirms fears of deeper labour market weakness. The BLS revisions need to be balanced with August US producer price (Wednesday), consumer price inflation (Thursday) and inflation expectations in the University of Michigan consumer survey for September (Friday) which are expected to reveal more signs of tariff-related inflation and argue in favour of a more gentle 25 bps rate cut next week. On Thursday, ECB President Lagarde probably faces one of the more easy-going press conferences since taking the helm at the central bank. An unchanged policy decision will be backed by nearly unchanged GDP and CPI forecasts in a world of reduced geopolitical uncertainty. It helps Lagarde spreading the message that monetary policy is in a comfortable position to face the future. We see a next evaluation point as early as March of next year. EMU money markets currently err slightly on the dovish side, pricing a 37% probability of a rate cut before year-end. Finally, we keep a close eye at the US Treasury’s mid-month refinancing operation. Tuesday’s $58bn 3-yr Note sale is followed by a $39bn 10-yr Note deal on Wednesday and a $22bn 30-yr Bond auction on Thursday. The recent bull steepening of the US yield curve also helped the very long end of the curve (30-yr) away from make-or-break levels (5%). Question remains whether there will be a lot of interest at current levels given the still dire shape of US finances and political & reputational risk still present (eg Fed independence debate).
News & Views
Two weeks ahead of the Swiss National Bank’s September policy meeting, the central bank’s governor took a critical view of reintroducing negative interest rates. The current level stands at 0% and recent inflation numbers (0.2% y/y) at first glance suggest further monetary easing is perhaps needed. Martin Schlegel in an interview with Migros Magazin, however, said the hurdle to revert back to an era of negative rates is high. He added that it can have undesirable side effects, for example for savers and pension funds. Schlegel pushed back when asked whether the central bank shot its monetary powder too early, saying that making forward-looking decisions is key in order to avoid having to take stronger countermeasures later. Schlegel’s views were in line with those the vice-governor aired end of August. Market implied odds for another 25 bps cut remain around 25% for end 2025 though. The Swiss franc strengthens today to EUR/CHF 0.932. Schlegel in the interview wasn’t so concerned about the strong CHF, since its real appreciation was not as great.
The EU is considering a 19th sanction package against Russia over its war with Ukraine. The sanctions would target about half a dozen Russian banks and energy companies as well as Russia’s payment and credit card systems, crypto exchanges and additional restrictions on its oil trade. Oil prices rebound today after losing ground over the three previous trading sessions, when it anticipated OPEC’s decision last week to further restore oil output. Brent currently trades around $66.8 per barrel and remains firmly established within a $65-$75 sideways trading range.
