Brent crude oil prices are holding on to recent gains near $110 a barrel. Bond yields are edging higher while stocks are extending their recovery. French 10-year bond yield premium over Germany is closing in on a 24-year high. USD is mixed just above yesterday’s lows, with interest rate differentials supportive of the currency.
UK
GBP is up versus USD and EUR. UK September CPI inflation ran hot. A 25bps BOE policy rate hike to 4.00% on November 5 is pretty much a done deal.
Headline CPI rose to an 11-month high at 3.5% y/y vs. 3.1% in August, driven by higher motor fuel inflation, exceeding consensus (3.4%) and the BOE’s projection (3.0%). Core CPI matched expectations at 2.8% y/y vs. 2.6% in August, but services CPI rose 0.3ppt to a four-month high of 3.7% y/y, overshooting consensus (3.6%) and BOE projection (3.3%).
The swaps curve still implies 113bps of BOE tightening in the next twelve months. We see scope for less which is a headwind for GBP: (i) The UK economy is operating below capacity, (ii) virtually no real wage growth constrains spending, (iii) the policy rate is near the top of the BOE’s estimated 2% to 4% neutral range, and (iv) fiscal policy will likely turn more restrictive following the October 28 UK budget.
BOE Governor Andrew Bailey will have an opportunity to address the inflation overshoot during today’s fireside chat (2:00pm London, 9:00am New York).
INDONESIA
IDR weakened slightly. Bank Indonesia (BI) kept rates on hold at 5.75% for a fourth straight meeting. Markets were split, with some expecting a hike to support the currency after MSCI’s surprise downgrade warning last week heightened the risk of capital outflow.
BI projects Indonesia’s current account deficit (1% of GDP in Q2) to widen to be between 1.6% and 2.4% of GDP in 2026. That raises external funding needs just as MSCI downgrade risks threaten capital outflows, keeping IDR under downside pressure.
Still, BI’s ample FX reserves provide scope to cushion IDR weakness, particularly against a relatively modest spot turnover of around $7bn a day. BI FX reserves totaled $125bn in September (8.4% of GDP).
As a background, MSCI announced the launch of a consultation on a proposal to reclassify Indonesia’s stock index from Emerging Market to Standalone Market status, bypassing Frontier Market classification. MSCI will announce its final decision by the end of June 2027.
ISRAEL
Bank of Israel (BOI) is widely expected to keep rates on hold at 3.25% after delivering three consecutive cuts (2:00pm London, 9:00am New York). Nevertheless, BOI has room to ease further as Israel headline CPI inflation has been running below the midpoint of the bank’s 1-3% target range since January. The swaps curve implies more than 125bps of cuts in the next twelve months.
Regardless, ILS will take its cue from tech stocks and Israel’s legislative election on October 27. Israel’s large tech sector, roughly 20% of GDP, ties ILS closely to the AI trade. Domestic politics could reinforce or offset that external influence. A Netanyahu bloc victory will likely revive the judicial overhaul and concerns over the rule of law, weighing on ILS. A centrist government could reduce institutional and geopolitical risks, supporting ILS.
