Riskier Assets Rebound as Political Concerns Fade

The currency markets continued to trade sideways, as the focus this week appears to be on political events, with the lack of hard data to drive markets. European core yields are broadly down but have started to come up from lows, as stock markets shrug off early jitters and move higher, led by a rise in the German DAX, which continues to ignore political wobbles that are feared to send Germany on the road to snap elections and put Merkel’s future as Chancellor in question. Eurozone peripherals are also outperforming the German benchmark after ECB’s Draghi re-assured markets of the ECB’s ongoing support.

BoE officials meanwhile continue to hint at further tightening ahead, but also that any moves will be limited and gradual. On the data front U.K. public finance data showed higher than expected borrowing in October, but also a sharp improvement in the CBI industrial trends survey.

BoE MPC members are sounding mixed during testimony before the parliamentary committee. Saunders said that rates will need to rise further “over time” and that pass-through price pressures from the weaker level of sterling is “far from over.” The dovish leaning Cunliffe (who, along with Ramsden, dissented against hiking rates this month) said that inflation has been a bit lower than BoE forecasts and that CPI should peak during this quarter, adding that he prefers to “wait until their is clear evidence of wage growth” before hiking.

UK Government Borrowing Increased More than Expected

UK government borrowing increased by GBP 0.52 billion to GBP 7.46 billion in October 2017 from GBP 6.95 billion in October 2016, above the median forecast for GBP 6.60 billion. Excluding banks, borrowing came in at GBP 8.0 billion, up 6.9% year over year, largely driven by a 25% rise in interest costs. Overall government debt increased by GBP 46.1 billion to GBP 1,632.4 billion, which is equivalent to 79.6% of GDP.

The Reserve Bank of Australia’s Lowe said that its more likely that next rate move will be up, although he stressed that there is no strong case for a near-term adjustment in policy. The comments, coming on the heel of rather dovish minutes earlier, confirm our assessment that the RBA will eventually hike rates, but remain on hold well into the new year.