PERU: Economic Activity Rises 3.2% Y/y In August, Marginally Above Consensus

The 10-year BTP/Bund spread is testing the 78bps handle, with today’s 2.5bp tightening supported by positive risk sentiment (the S&P 500 index marked a fresh all-time high today, with EStoxx 50 index also up almost 1% intraday).

• The immediate downside target in the spread will be the August 13 close at 76.7bps, after which the 70bp handle will be in focus.
• Alongside the solid risk backdrop, September’s BTP/Bund narrowing has been supported by an ongoing pullback in EUR rates vol and relative political stability in Italy compared to the likes of France.

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EXECUTIVE SUMMARY: 

• At the start of the month, analyst and market expectations were fairly comfortably in favour of a 25bp Norges Bank cut on September 18th. However, domestic data released over the past two weeks have made the decision a much closer call.
• We currently lean against consensus in favour of a hold at 4.25% - a risk we thought markets were underappreciating even before the recent run of domestic data.
• If rates are held on Thursday, we expect soft guidance for a 25bp cut in December.
• Whatever the rate decision, the September MPR rate path is expected to be revised higher relative to June, pointing to a higher terminal rate landing zone than the 3.00-3.25% currently implied.
• Although market pricing still tilts in favour of a cut, price action over the past two weeks has clearly been in a hawkish direction. Recent moves, alongside the split analyst consensus, opens the door to a material knee-jerk reaction under any rate decision scenario on Thursday.

AUDUSD (7th Nov) 68.50c, bought for 0.25 in ~3.1k total (multiple clips).