Euro gains a little yesterday, but dollar fights back overnight
French yields steadied somewhat yesterday, moving lower again, and are now around 15bps below the 10-year yield closing high of over 4.9% reached last Thursday. That helped the euro, as it bounced off its year-to-date low of $1.1160 on Monday, gaining back a cent to $1.1260 yesterday afternoon. However, much of that move reversed overnight, with the dollar strengthening against a range of currencies, and the single currency is back down to $1.1225 this morning. The euro is little changed against sterling but has lost a small amount of ground to trade at 84.75p. As a result, the pound gained slightly against the dollar, rising to around $1.3280 yesterday, but again the dollar has edged higher overnight, leaving sterling at just under $1.3250 this morning. There are still plenty of concerns about France and its public finances, so French bonds and the euro may yet come under renewed pressure in the days ahead.
French 10-year bond yields have continued to edge down, with yesterday marking a third straight day of gains, which has seen the 10-year yield come back to 4.75% from just over 4.9% last week. However, there remain significant concerns about the French public finances and how they will manage to rein in a deficit of circa 6%, and the student protests at the moment are also not helping with concerns about political stability heading into a crucial presidential election next year. That means, despite the improvement in yields, that there is a sizable risk premium remaining in French yields, with the spread to 10-year German Bunds at 130bps. That said, French Finance Minister Lescure said that France is ‘far from’ needing any ECB intervention despite the current stresses. In equity markets, the Eurostoxx posted a third day of gains, up 0.5% for the day, while the S&P 500 ended higher again, up another 0.6%, to once again set a record high.
Euro Area retail sales were softer than expected. They rebounded from a fall in July to grow 0.1% in August, but that was below the consensus of a 0.3% gain, meaning the annual change came in at a very modest 0.8%. The impact of higher fuel prices continues to be felt, with the volume of fuel sales falling and dragging down overall sales. On a more positive note, because of this, if we strip out fuel, other consumer categories such as food rose on the month. The EU consumer remains under pressure from energy costs, and the pace of annual retail sales growth has slowed notably from rates of above 2% at times earlier in the year.
Contrasting with the problems in some other EU states, Ireland’s Budget 2027 yesterday presented the public finances, on the face of it, as being in good shape. The Budget measures (increased capital spending, tax cuts including income taxes, social welfare increases, investment accounts) were well flagged, with the Budget day package of €8.65bn broadly in line, but slightly above, the package mooted in the summer statement. Despite the largesse, the Government is still targeting a General Government surplus of some €9.5bn next year, or 2.5% of GNI*, with gross debt falling to 56% of GNI* (closer to 35% on a net basis). However, the Fiscal Advisory Council criticised the Budget, saying it puts the public finances on a ‘worse trajectory’. They note that the Government has once again failed to keep to its own (2021-set) current spending increase limit of 5% per year, with 2026 running at closer to 9% on the basis of yesterday’s budget figures, and the Budget plans a close to 6% increase next year. The Government finances are also being supported by a potentially unsustainable and highly concentrated corporation tax take, which is forecast to be €34bn this year and €39bn next year, representing over 30% of total tax revenue.
Several central bank speakers spoke yesterday from all major banks and all pointed to a hiking bias in each jurisdiction. Catherine Mann of the BoE said the UK labour market was ‘static’ and not weak enough to bring down inflation, with inflationary pressure becoming embedded. She said the Bank of England ‘cannot be behind’ on policy and noted inflation is expected to rise ‘notably’ above 4% next year. Olli Rehn from the ECB said energy price pressures might persist for some time and second-round effects are not visible yet, but these effects ‘can emerge gradually and unnoticed’, while his colleague Kocher said that the risk of higher inflation and lower growth in Europe has increased. Meanwhile, Schmid from the Kansas Fed said there is a ‘way to go’ in taming US inflation and the Fed’s credibility was at stake unless they could rein it in.
On the agenda today, we get the NY Fed’s inflation expectations and FOMC minutes and, overnight, the UK RICS house price balance. On the speaker front, we have Vujcic from the ECB.