Risk Indicators Tick Lower
Risk continued to trade on a soft note overnight with AUD leading the way in the FX space. Most major equity markets were trading in the red at the time of writing while periphery spreads to Germany widened for a second consecutive day. Sino-Japanese tensions escalated another notch overnight over the ownership of islands in contested waters, though the impact on the currency markets is largely a function of wider risk appetite. The German ZEW index came in slightly above expectations at -18.2 up from -25.5. The current conditions were softer however at 12.6, vs consensus 17.7. UBS economics notes that the slight improvement in ZEW index may be taken as another sign that lead indicators are bottoming, although the number was positively influenced by ECB/ESM decisions. UK August CPI inflation was in line with expectations at +0.5% m/m and +2.5% y/y; RPI inflation slightly lower than expectations at +0.4% m/m (consensus +0.5%) and +2.9% (consensus +3.1%). EURSEK pushed lower after the Riksbank minutes were released. The minutes noted that ‘several members touched on recent developments of the krona and noted that the appreciation that was forecast earlier had come sooner than expected.’ Note that this was Sept. 6, when EURSEK was much lower. The decision to cut the repo rate was primarily driven by the impact on inflation expectations, as growth numbers were actually revised higher. Earlier in the Asian session, the latest set of RBA minutes were even more dovish than the policy statement indicated two weeks ago. Crucially, a key phrase made a reappearance for the first time since June – the board noted that “the inflation outlook continued to provide scope to adjust policy in response to any significant deterioration in the outlook for growth”. This is consistent with the views of our Australian economics team who expect the RBA to deliver a further 50 bp of easing by year-end. Additionally, in the wake of these minutes, our economists now see an increased likelihood that the first 25 bp of easing could come as soon as the October meeting.
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UBS Investment Bank