AFS Markets Blog: Midday 30/10/2026

• Meanwhile in markets, ECB-speakers this morning gave a hawkish twist to yesterday’s Governing Council meeting, which was decidedly unhawkish (though not dovish either);
• Of all ECB-speakers, the most hawkish Governing Council member hitting the mic post-meeting was none other than Bank of Italy President Panetta (a supposed dove). Contrary to the official line of not signaling multiple hikes, Panetta did just that, saying that “with inflation set to remain above target for an extended period and risks skewed to the upside, further increases in the policy rates could prove necessary.” Notice the use of plural: increases;
• Panetta’s colleague Nagel, the President of the Bundesbank, said that the interest rate decision yesterday wasn’t an easy one, thus suggesting that a hike would have been logical (which is true). He also warned that the ECB would step up the pace of rate hikes or rate increments if price increases broaden;
• I have penciled in just one more quarter point hike in December. But I also think that ESTRs should price in sizeable odds of a hike in March, and that a February meeting – Lagarde’s last – is live too;
• At the same time, stagflationary tendencies are emerging. Price expectations in the business sector are rising further according to monthly survey data. Given the level of energy futures prices and high margins on refined products, Eurozone headline inflation will rise substantially north of four percent in the coming months. And while core inflation hasn’t increased noticeably yet, increases in underlying inflation are only a matter of time;
• Compared with the 2022 energy shock, the ECB now finds itself confronted with a weakening labor market instead of a strong and tight one. Such weakness on its own is bad enough, given the civil unrest we see in France and elsewhere in Europe. Weakness is no longer confined to esoteric indicators, like the relentless but still gradual decline in job vacancies. Euro Area unemployment has turned the corner. And not in a good way. Rising unemployment in Germany and France has pushed up broad Euro Area unemployment to 6.5% in September from a low of 6.2% two years ago. Furthermore, according to business survey data firms’ expectations for employment levels are flat. Meaning little or no employment growth. Those same surveys point to soft underlying GDP growth of barely a percent, substantially lower than the headline and often Ireland-influenced GDP figures;
• ESTRs have barely budged in the wake of hawkish ECB-speakers while we should have seen rates grind higher;
• Turning to some broad market commentary, bonds, equities, energy price futures are up for the week. The trade-weighted dollar is up marginally while the broad euro is the big loser, falling to its lowest level since the spring of 2025;
• UST yields are down 3-7bps for the week and a massive 31-37bps lower for the month on the back of deflating AI equities and widening spreads on AI bonds. The 10y UST at 4.93 and the 30y at 5.29 have fallen through their respective 50-DMAs though the more important 200-DMA is still tens of basis points lower than current levels;
• Bund yields are flat for the week and down a more measure 14-25bps for the month. OATs have done well this week, falling 5-13bps as France managed to avoid rioting and looting that we witnessed earlier in the month. Le Spread – France versus Germany 10y – at 160bps is about twenty bps below the highs;
• The Stoxx 50 is up a percent and a half for the week. And at about 6.5% below the peak, we’ve avoided falling into correction territory.  The S&P 500 is up more than a percent for the week. The twenty AI stocks on our market screener are up three percent for the week on average. But for the month, we’re down 12.6% on average;
• Dutch natgas futures have rallied strongly, rising more than 10% to 103.3 euros per MWh as Germany scrambles to fill its gas reserves, which are among the lowest in Europe. Brent crude is up almost a percent. And at $117.6 a barrel, the $120 handle that we saw earlier in the Iran war is getting closer;
• Looking ahead, today’s calendar is unexciting, but next week’s calendar is packed. The main event is Tuesday’s US midterms, which the GOP is likely to lose big. Polls and prediction markets favor a Democratic sweep of both the House and the Senate. There’s plenty of major central bank speak. Plus, we get monthly US labor market data next Friday. Which is unlikely to stay in the way of a quarter point Fed hike in December.