HUNGARY: Fitch Ratings Update Could Provide Another Headwind for HUF
Fitch Ratings is scheduled to provide a review on Hungary’s sovereign credit rating after hours today (current rating: BBB; Outlook Negative). This comes just one week after Moody’s lowered its outlook of Hungary’s debt to negative from stable, citing weaker governance that risks losing grants and low-cost loans from the EU, a decision which weighed on HUF at the start of the week.
- Fitch affirmed Hungary’s rating at BBB back in June, noting then that its negative outlook reflects a number of risks including the policy environment. Fitch also said it does not expect significant progress on unlocking partially suspended EU funds this year.
- The subject of frozen RRF funding has once again entered focus this week, with Politico reporting yesterday that unless Hungary can carry out 17 measures and gain the Commission's approval by Dec 31, around EUR 1bn in EU cash will be gone for good. Approximately EUR 20bn remains frozen in total.
- Separately, PM Viktor Orban said on state radio this morning that he would veto the EU's next multiannual financial framework unless funds are unfrozen. While the threat may sound severe, it is not the first time the Hungarian leader has threatened to veto various EU packages in an effort to extract concessions, only to reach last-minute compromises.
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GILT AUCTION PREVIEW: Coupon size announcement
The DMO has announced a 4.375% coupon for its new Mar-28 Gilt, of which GBP4.0bln are to be sold next Wednesday, November 13.
FED: Powell Has Questions To Answer On Long-End Rates (2/2)
Chair Powell has plenty of pretext to fend off any questions over the implications of the election for monetary policy, and will as always reiterate the importance of the Fed’s political independence and won't comment on the potential impact of fiscal policy changes. But related to this – and trickier for Powell to answer – will be questions about developments across the rates spectrum since the last meeting, which may suggest caution over the approach to easing.
- First, what does the FOMC regard as the reason for the recent bear steepening in the yield curve, and second, does this run counter to the Committee’s desire to return overall policy closer to neutral?
- On the first question, the rise in the long-end of the curve (10Y yields up over 80bp since the September meeting) has been driven by real yields. 10Y TIPS-implied inflation breakevens are up 26bp since the pre-September FOMC lows close to 2%, which were lowest since Jan 2021 - and up 7bp post-election, now set to close at the highest since May, at 2.37%. But even more impressively, TIPS-implied 10Y real yields are up 12.5bp since election day, and 56bp since September lows - contributing the bulk of the rise of the 10Y yield.
- This implies among other things that monetary policy is seen being tighter for longer. And 10Y term premia, a compensation for the risk of holding future uncertainty, had already risen to the highest since November 2023 pre-election.
- Much of this move has been attributed to political developments, with the potentially inflationary implications of a “Republican sweep” scenario being priced in.
- While he won’t opine on the politics, it will be interesting to hear his answer to the question of whether the Treasury long-end’s reaction is due to any perception that the Fed erred in making such a large cut in September - given a resurgence in risk assets, a string of upside economic surprises, and a rise in inflation expectations.
- Another question is whether the FOMC is comfortable with the growth-dampening and financial condition-tightening implications implied by longer-end yields rising. For instance, mortgage activity has already slowed again as rates have rebounded higher – does the FOMC see this as being aligned with their dual mandate goals at this stage of the cycle?
- And for December's meeting, there will be multiple implications: first for the Dot Plot, which as noted above could see some dots drift higher for 2025, and could hasten an increase in the Longer-Run dot. And second for the rate decision itself: the bar is set a little lower for a skip, due to a combination of robust data, potential that the Fed sees the movement in the long end of the curve as undesirable and indicative of renewed growth/inflation prospects (ie the election result).
