KBC Sunset Market Commentary 11/12/2024 via Trader Talent

KBC Sunset

Wednesday, December 11, 2024

Daily Market Overview

Click here to read the PDF-version of this report

Markets

• Today’s November US CPI inflation numbers convinced final doubters that the Fed would stick to the plan set out in the September dot plot and lower rates by 25 bps at its policy meeting next year. The data printed bang in line with expectations: a 0.3% monthly increase in both headline and core CPI with annual readings respectively rising from 2.6% to 2.7% on a headline level and stabilizing at 3.3% for the core gauge. The stalling disinflation process equally boosts the case for a January pause by the Federal Reserve, awaiting the inauguration of president-elect Trump on January 20. Uncertainty on his future (fiscal) agenda favours erring on the side of keeping some powder dry. Other elements in favour of such scenario are stronger-than-expected growth, enthusiastic survey data since the Republican sweep, rising short term inflation expectations and Fed talk on a gradual approach. The US yield curve bull steepens today with yield changes ranging between -4.2 bps (2-yr) and -0.8 bps (30-yr). The long end of the curve still has an eye on tonight’s $39bn 10-yr Note auction and on tomorrow’s $22bn 30-yr Bond sale. Are investors keen to load up on more US Treasuries at current levels with a potential debt bonanza looming? The US dollar is marginally weaker on a trade-weighted basis. EUR/USD spiked very temporarily towards 1.0540, but is already back at 1.05 in anticipation of a dovish 25 bps rate cut at tomorrow’s ECB meeting. USD/JPY rose from 151.50 to 152.50 before returning some gains after the US CPI report. A Bloomberg report suggesting that BoJ official see a small cost to waiting before raising interest rates caused the initial JPY-weakness. Speculation on a December BoJ rate hike was recently rising following higher inflation & stronger growth numbers and some BoJ talk. At the same time, the article suggested that some aren’t against a rate hike on Friday if it is proposed, adding some ambiguity. USD/CAD tends to weaken after the Bank of Canada’s expected 50 bps rate cut to 3.25%. YtD highs around 1.42 hold and the recent failed test of this resistance area triggers some rebound action lower towards 1.4140. The BoC sees a gradual approach from here if the economy evolves broadly as expected. The central bank will be looking at core inflation to assess the inflation trend after some government tax breaks. BoC governor Macklem labels the US tariff threats as major new uncertainties.

News & Views

• Chinese leaders and policymakers are contemplating to allow the yuan to depreciate in 2025, a Reuters exclusive reported citing people with knowledge of the matter. Doing so would mean breaking with the usual policy goal of keeping the exchange rate stable. The shift comes as China braces for US import duties under a second Trump presidency. The president-elect during his campaign threatened with tariffs up to 60% on Chinese imports. Allowing CNY depreciation would blunt some of the impact and protect the one sector (ie export) of the economy that has been doing well. The matter is all the pressing given that Chinese authorities are said to set next year’s growth target in the same ambitious 5% range as this year’s. China’s yuan slid after Reuters ran the report with USD/CNY jumping from the 7.25 area towards 7.275 before paring gains (CNY losses) to 7.264 currently. A source tapped by Reuters said the PBOC has considered the possibility the yuan could drop to USD/CNY 7.5 to counteract any trade shocks. That would be the weakest level since 2007.

• Strike 5. OPEC for a fifth straight month slashed its oil demand forecasts for this year and the next. Lowering consumption growth by 210k barrels a day to 1.6mn for 2024 marked the deepest cut so far. Demand growth has been reduced 27% since it started adjusting projections downwardly from July on. For 2025 it reduced growth by 90k barrels a day to 1.4mn. The move “takes into account recently received bearish data” for Q3 including “downward revisions to OECD Americas and OECD Asia Pacific”. Despite the string of cuts, OPEC remains considerably more bullish on oil demand compared to others in the oil industry, including the IEA. OPEC+ last week decided for a third time to postpone the removal of some oil production curbs while also slowing the pace of increases once they start doing so somewhere next year. Oil prices grind higher in choppy trading. Brent currently is sold for $73/b.