Markets
What financial commentators are increasingly describing as a chronicle of a death foretold finally played out in the European sovereign debt markets, as the Belgian 10-year OLO-swap spread touched the psychological 100-basis-point threshold. The spread surged sharply from its previous Friday close of 94 basis points following the abrupt collapse of multiannual budget negotiations over the weekend. Prime Minister De Wever felt compelled to travel directly to the King to offer his resignation as the political gridlock reached a breaking point. While the King did not accept the resignation immediately, choosing instead to urge coalition partners to find a viable compromise, the political landscape has shifted dramatically.
Beginning the following day, the King initiated consultations with party leaders from the ruling Arizona coalition, with plans for a follow-up meeting with Prime Minister De Wever. The tone in analytical pieces and columns by most political commentators shifted overnight from cautious optimism regarding a potential pathway out of the budget deadlock to open discussion about the rising probability of early elections. Curiously, despite the domestic political turmoil, Belgian OLOs significantly outperformed other EMU debt instruments during the session. By contrast, the French 10-year swap spread ceded 2 basis points, even in the wake of rating agency Fitch unexpectedly revising the stable outlook on France’s A+ credit rating to negative late last Friday. Meanwhile, the 10-year BTP-swap spread experienced an even more pronounced decline, dropping by 5 basis points.
The single currency found itself unnerved by the idiosyncratic underperformance of Belgian debt, driven primarily by two distinct dynamics. First, traders noted a distinct lack of broader contagion into other regional sovereign debt markets, keeping the crisis heavily localized to Belgium. Second and foremost, the foreign exchange market reacted heavily to a significant and sudden decline in global energy prices. Brent crude oil tumbled from a Friday close of $117.64 per barrel down to approximately $106.40, a move aided in part by contract-roll mechanics. Simultaneously, European wholesale natural gas prices experienced a sharp correction, sliding from €104 down to €96 per megawatt-hour.
Relief swept through energy markets following reports that US President Trump favored pursuing diplomatic channels to navigate the Iranian quagmire rather than opting for fresh military interventions. At the same time, a prominent report published by the Wall Street Journal detailed a concerted US push to resume Russian gas sales to Europe. This proposal was reportedly framed as part of broader negotiations aimed at securing an energy ceasefire ahead of the upcoming winter heating season. As these energy supply pressures eased, the EUR/USD exchange rate climbed steadily, moving from an opening level of 1.1160 to trade near 1.2220.
Across core sovereign bond markets, yield curves displayed a modest bull-flattening tendency in both the United States and Europe. The front end of the curve barely budged, while long-term yields drifted lower by 2.5 basis points in Germany and by as much as 4 basis points in the United States. Central bank commentary continued to influence rate expectations, with European Central Bank policymaker Kazimir stepping forward to emphasize that last week’s pause in rate hikes should not be misconstrued as a finish line. Kazimir argued that weaker macroeconomic growth may not prove sufficient on its own to cool underlying inflationary pressures, warning market participants that they may still be underestimating the ultimate policy tightening required by the central bank. European Monetary Union money markets had recently dialed back their tightening bets, pricing in a peak rate range between 3% and 3.25% across two to three remaining expected moves. In the United Kingdom, Gilts outperformed their continental peers, with UK yields declining by 7 to 9 basis points across the entire curve.
Across the Atlantic, the October US manufacturing ISM index kicked off a heavy week of macroeconomic data releases with a notable upside surprise. The ISM index beat consensus expectations for a mere stabilization, rising firmly from 54.5 to 55.5 to record its second-strongest reading since May 2022. Underlying details within the report showed that new orders continued expanding at a robust pace, ticking up to 55.5 from 55.3, while firms actively expanded their payrolls, with the employment sub-index holding near expansionary territory at 52.4 compared to 52.7 previously. These hiring trends closely followed accelerating production levels, which jumped from 56.7 to 59.0. Supply chain frictions persisted, with supplier deliveries remaining notably stretched at 59.1 from 59.0, while prices paid by manufacturers continued to rise strongly, albeit at a slightly less fierce pace than the previous month, dropping from 77.9 to 75.2. Taken as a whole, the data suite continued to reinforce the fundamental economic case supporting a Federal Reserve interest rate hike in December.
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In other developments, fresh research published by the European Central Bank revealed that the upward momentum in food repricing by European supermarkets—undertaken in response to the Middle East energy shock—has been notably weaker so far than the aggressive repricing wave witnessed in 2022 following Russia’s invasion of Ukraine. To monitor these dynamics closely, the ECB developed the Daily Price Dataset (DPD) in 2022 as a specialized analytical tool designed to track supermarket price developments in real time as they unfold across the broader economy. Monitoring these retail shifts remains crucial for central bankers because whenever an external energy price shock strikes the economy, consumer food prices are historically among the first to react, carrying immediate and tangible consequences for household purchasing power and consumer inflation expectations.
According to the ECB researchers, the DPD demonstrated that the frequency of food price increases did indeed tick upward in March 2026, shortly after the geopolitical conflict in the Middle East erupted. However, that initial surge in repricing frequency was substantially smaller than the dramatic spike recorded during the 2022 energy shock. Furthermore, the statistical gap between the frequency of price increases and price decreases remained narrow—significantly smaller than the wide margin observed during the 2022 crisis. Interestingly, while the average magnitude of individual price increases was comparable to the episode experienced more than four years ago, researchers observed a key structural difference. Following the initial uptick in repricing frequency across individual food product categories in 2026, that frequency failed to rise and widen sequentially through the retail sector in the sustained manner that characterized the 2022 inflationary wave. The authors of the study concluded that following the 2026 energy shock, they found little evidence so far of a persistent, structural change in how frequently retailers reprice food items, marking a stark contrast to the persistent inflationary behavior seen in 2022.
Meanwhile, labor tensions escalated significantly in Germany, where strikes are spreading rapidly across the nation’s vital metal and electrical engineering industries. Workers at several major manufacturing companies downed tools as the influential IG Metall union dramatically ramped up the pressure in an ongoing, high-stakes pay dispute. Representing approximately 3.7 million industrial employees across the country, Germany’s largest industrial union is demanding a substantial 5% wage increase starting in November, alongside a series of crucial non-wage demands aimed at safeguarding domestic jobs and protecting local production sites against downsizing. The coordinated strikes were launched as a direct response to a second, revised wage offer put forward by employers, which had proposed a modest one-off payment of 1% scheduled for July of next year, followed by a 1.3% wage increase in July 2028. The leadership of IG Metall swiftly dismissed the employers’ proposal as inadequate, characterizing it as a clear pay cut in real terms given the prevailing economic environment.
