CZECHIA: ANO, SPD & Motorists To Sign Coalition Agreement On Monday

Sovereign rating & fiscal divergence feed into EGB spreads again this morning.

• 10-Year OATs ~0.5bp wider vs. Bunds, while Iberians & BTPs trade 0.5-1.0bp tighter.
• As a result, the 10-Year SPGB/OAT/PGB fly is ~1bp off cycle closing lows, last -67bp.
• France’s sovereign rating outlook was moved to negative at Scope Ratings on Friday, while Spain received one-notch upgrades at both Fitch & Moody’s (this generally met wider expectations).
• Meanwhile, French PM Lecornu pushed back against some of the Socialist Party’s preferences when it comes to fiscal reform (an outright wealth tax & reopening old pension agreements). Lecornu also pointed to a deficit/GDP ratio of 4.7% for ’26, very close to former PM Bayrou’s 4.6% target. This backdrop underscores the idea that the current PM will face many of the same difficulties as his predecessors, keeping French political and fiscal risk elevated in the immediate term.
• Ahead of Friday’s ratings action J.P.Morgan noted that “Spain remains our favourite pick for a strategic overweight in the intra-EMU space given strong fundamentals and limited political/fiscal noise compared to larger peers”. They recommended switching an existing long 10-Year SPGB vs. BTP & Bund equal-weighted fly to a long 10-Year SPGB vs. OAT & Bund equal-weighted fly, given the French risks.

• As mentioned earlier given the bid in Bonds and US Treasuries, a drift lower in Yield, Market Participants will be looking for more upside risk into the Yen.
• The JPY has extended broader gains against the USD, GBP, and the EUR.
• The Moves in FX are a function of the Yields and in turn the Dollar, USD prints a fresh low against the GBP, CAD, CNH, CNY, ILS, CHF, CNH, CNY, and PHP.

Looking at the other three member’s (Thedeen, Bunge and Jansson) comments in the minutes, only Thedeen explicitly suggests the September rate cut is likely to be the last of the cycle, but Jansson and Bunge seem to be providing implicit support for this view.  Both Thedeen and Jansson express a willingness to shift views (i.e. move towards hikes) if inflation surprises more persistently to the upside, but both play down the likelihood of this occurring. Overall, the minutes echo the sentiment from the September decision. There were good arguments for another rate cut in September, but there is very little (if any) appetite for further easing unless something drastic changes in the outlook.

• Thedeen’s comments suggest he considers the September cut as an insurance cut: “Even though some risks remain, the arguments in favour of lowering the interest rate and thereby providing further stimulus to demand in the economy outweigh the counterarguments. As I now judge the situation, this will probably be the last cut in this interest rate cycle”
  • "If demand were to become unexpectedly strong next year, and this were to threaten price stability, we will have to start rate rises earlier than we currently plan and have expressed in the policy rate path. My assessment is, however, that there is a fairly low probability of such a development”
• Jansson’s decision to cut looks to have been a close call, but ultimately “if one believes that the economy needs a little more support, it is appropriate to give it as soon as possible, that is, already at the meeting here today”
  • Interestingly, Jansson highlights that although the Riksbank has now judged several individual inflation episodes as temporary, “there is no getting away from the fact that this is a fairly long period with inflation above our target level”.
  • Jansson plays down the inflationary/growth risk from the Government’s fiscal policies.
• Bunge interestingly places a lot of emphasis on weak sentiment for her decision to cut – even though sentiment has been improving from weak levels in recent months: “I am concerned over the continuing pessimism among households expressed in surveys and confirmed by companies… in light of the weak economic situation, I consider it reasonable to act now and, through an easing of monetary policy”
  • “My basic view is that the VAT cut will not change the picture of inflation beyond the short term and is therefore something we should ‘see through’.”