• Asia’s equity scorching rally (HK more than +5%) following unconfirmed social media reports that China is preparing its exit from zero-Covid was met by a lukewarm European response. Stocks rose less than 1%. Wall Street traded opening gains for 0.2-0.9% losses. This came on the back of strong US data, going from a final manufacturing PMI back above 50 to an unexpected jump in JOLTS job openings to 10.7 mln over a slightly better-than-expected manufacturing ISM indicator. They casted doubt over the hoped-for slowdown in Fed tightening after tonight’s meeting. This caused a sharp U-turn in US Treasuries with German Bunds caught in a slipstream. Earlier yield declines of well over 10 bps both in the US and Europe were cut and in some cases more than fully erased. Eventual changes in the US ranged between +6.2 bps (2y) to -7.3 bps (30y). German yields fell 1.1-2.2 bps at the belly of the curve. The dollar on FX markets reversed course and went from EUR/USD 0.995 to 0.987. The trade-weighted index rebounded from support at 110.78 to 111.48. USD/JPY closed at 148.3. Sterling eked out a tiny gain against the euro (EUR/GBP 0.86) and the dollar (GBP/USD 1.148). The Bank of England yesterday sold its first batch of gilts (£750 million) from its QE portfolio.
• Stocks in the Asian-Pacific region trade mixed. HK and China continue to outperform though even as the mainland put another area in lockdown. The yuan extends gains to USD/CNY 7.27 with the US dollar generally under a bit of pressure ahead of the Fed meeting later today. Core bonds lose some territory with an interview by Nagel and de Cos published after-market yesterday weighing too. The ECB members stated very clearly that tightening is far from over. Nagel argued for decisive action “as we have done at the past three meetings”. He said QT should start at the beginning of 2023.
• Today’s ADP jobs will be overshadowed by the Fed meeting tonight. A fourth 75 bps rate hike is a done deal. That would lift the main policy rate to 3.75%/4%. We argued before that the Fed would slow down the tightening pace in December to 50 bps and we expect Powell to bring some kind of an announcement. The Wall Street Journal article from October 21 solidified our case. It ran a story of the Fed mulling the possibility of going slower after one last supersized hike in November. The journal has close ties to the Fed – it flagged for example the 75 bps decision in June. US bond yields since then have left the multiyear highs and have consolidated instead. But since money markets are still in between 50 and 75 bps for December, especially after yesterday’s strong data, there’s some short-term scope for US yields to the downside after tonight. Together with a better risk sentiment on stock markets, it may also pressure the US dollar.
• New Zealand published quarterly labour market data. Employment increased by 1.3% Q/Q in Q3, beating forecasts (0.5% Q/Q). Hours worked rose by 0.9% Q/Q despite higher illness-related absenteeism. The unemployment rate stabilized at 3.3%, marginally above the all-time low of 3.2% in Q4 2022 and Q1 2023. Private sector wages rose by 1.2% Q/Q with the Y/Y figure accelerating to 3.9%, the highest in at least 30-years. The strong labour market report suggests that the kiwi central bank (RBNZ) will continue to part ways with the Australian one. The latter (RBA) yesterday delivered a second consecutive smaller 25 bps rate hike while money markets expect the RBNZ to come up with a 75 bps move at the end of this month. The expected policy rate peak for New Zealand (5.25%) is also around 100 bps higher than the one for Australia. The kiwi dollar is marginally stronger this morning at NZD/USD 0.5865 with NZD swap rates 2 to 3 bps higher across the curve.
• Exit polls from Israel’s fifth election in less than four years all suggested a slim parliamentary majority (61-62 out of 120 seats) for the (extreme-right) bloc around ex-PM Netanyahu’s Likud-party. Current PM Lapid’s Yesh Atid party and its allies are predicted to win 54-55 seats with an Arab grouping polling at 4 seats.
The ECB ended net asset purchases and lifted rates by a combined 200 bps since the July meeting. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield rose to its highest level since 2011 (2.5%) before a correction kicked in. Losing the neckline of the double top formation at 2.14% calls for a return towards the 1.82%/1.77%/1.74% support zone.
The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 4.5% early next year and remain above a neutral 2.5% over the policy horizon. QT hits max speed. The 10y reached its highest level since 2007. Doji on the charts suggests room for short term correction with some Fed members calling to slow the tightening cycle.
EUR/USD trying to leave the strong downward trend channel since February. USD for the largest part of this year profited from rising US (real) yields in a persistent risk-off context. Geopolitical and European recessionary risks kept EUR in the defensive even as the ECB finally embraced on a tightening cycle. The current correction on bond markets weighs on USD. KEY resistance stands at 1.0350.
The UK government had to backtrack on its lavish fiscal spending plans which sent sterling initially tumbling towards the EUR/GBP 0.90+ area. Yawning twin deficits and rising risk premia will continue to weigh on the UK currency longer term even as markets think that the BoE will have to step up its tightening cycle. Short term support stands at EUR/GBP 0.8567.
This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.
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