Bond market swings continue to be at centre stage in world markets. On Thursday the French government presented its 2027 budget bill that aims to curb the booming deficit back to 5% of GDP. Following the announcement the spread between French and German 10Y yields rose to a new post euro crisis high. Uncertainty around French bonds spilled over to other markets as investors are growing increasingly worried about European public finances. On Thursday the 2Y EUR swap saw its largest decline since April as the market pricing for an October rate hike decreased to just 20%. EUR/USD continued to slide below 1.13.
Anxious mood in the markets curbed hike expectations also in the US. The probability of the Fed hiking also in October has declined below 30%, down from around 70% just a week ago. Along with market sentiment, data releases from the week provide support for the Fed holding rates at level in October. On Wednesday the August headline PCE came in at 3.4% y/y (cons: 3.7%) and core PCE at 3.0% y/y (cons: 3.3%). On Tuesday, JOLTS job openings data was softer than expected. We continue to forecast the next hike for December.
Inflation picked up momentum in Europe. Euro area September headline HICP inflation rose more than expected to 3.8% y/y (cons: 3.7%) driven by higher energy prices. Core inflation rose as expected to 2.5% y/y. The decrease in expectations for an October hike together with hotter than-expected inflation prints towards trouble ahead for the ECB. The markets seem to expect that ECB will not be hiking rates into a turbulent bond market – regardless of what the data indicates about the inflation outlook.
This week brought mixed signals on how long the energy shock will last. Various outlets have now reported that crude exports from the Middle East rebounded to pre-war levels in September. Despite the rebound in exports, Brent traded above the USD 100/bbl mark consistently throughout the week. A key actor pushing crude supply lower is national strategic oil reserves. Drawdowns from the US crude stockpile have slowed down significantly and there are hints that China has become pressured on its reserves, possibly reflected in China’s rising crude imports. An upcoming build-up of crude reserves back towards normal levels will take time; meaning that status quo in the oil market is far away regardless of Middle East exports normalising.
Wednesday next week minutes from the Fed’s September meeting will be released. With the turmoil in the bond markets, investors will be eyeing the minutes closely for any comments on inflation outlook. On Monday US ISM services index for September will be released. We will keep an eye on whether the ISM index confirms the strong readings from September flash PMIs. On Tuesday euro area retail sales and German industrial orders should give insight into how the European economy is fairing with higher energy costs. On Friday University of Michigan survey of consumer confidence for October is due for release. In September confidence fell to 48.1. Apart from May 2026, it was the most negative assessment on record, dating back to the 1950s.
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