KBC Sunrise Market Commentary 05/12/2024 via Trader Talent

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Market Commentary

Markets

•          Barnier turned out to be France’s shortest-serving prime minister since the establishment of the Fifth Republic in 1958. After only 90 days in his tenure – still double UK Truss’ term – parliament yesterday passed a motion of no confidence. President Macron’s search for a new PM rebegins. But any new administration faces the same issues: a minority government that needs to find common ground to address unsustainable public finances in a heavily divided parliament. Yesterday’s decision was widely expected and as such left little traces on the euro intraday but ongoing political uncertainty (including in Germany) obviously doesn’t help clear the cloudy skies circling over the currency. EUR/USD finished virtually unchanged just north of 1.05 only because of some ISM-induced dollar weakness. The services gauge fell to 52.1 from 56 vs 55.7 expected. The drop was broad-based with subseries including new orders, business activity and employment all printing lower. We don’t jump to pessimistic conclusions, there have been false negatives in the past (e.g. June). Fed chair Powell isn’t at all worried either. A “remarkably good economy” & less pronounced downside risks to the labour market allow the central bank to be “a little more cautious” in dialing back policy restrictiveness towards a more neutral level given that they’re “not quite there on inflation”. ECB’s Lagarde before the European Parliament struck a similar note on inflation but was more concerned about short-term growth prospects. Neither Lagarde nor Powell changed anything to our base case of a 25 bps cut by both central banks in December. Since this isn’t fully reflected in US money markets, yesterday’s disappointing ISM triggered UST outperformance vs Bunds. Yields dropped 4.4-5.7 bps across the curve. German rates added about 1 bp. Gilt yields whipsawed to close with changes <1 bp amid a (too) loosely quoted Bank of England governor Bailey as signaling four cuts next year. EUR/GBP closed at the lowest level (0.827) in 2.5 years. The near-empty eco calendar won’t inspire trading much ahead of tomorrow’s closely watched payrolls report. Weekly jobless claims could trigger some intraday volatility in a mostly technically-driven session. We keep looking for (long-term) core bond yields to find a bottom. EUR/USD has found some relief in yesterday’s weakish dollar but we don’t expect any gains to reach far.
 

News & Views

•          Czech average real monthly wages grew a more-than-expected 4.6% y/y in the previous quarter. Wage dynamics accelerated especially in services, profiting from rising domestic demand. Construction wages are starting to accelerate as well but there was a noticeable slowdown in industrial wage growth. The Czech industry had a weaker year with a still-uncertain outlook. All in all, the numbers add to upside inflation risks for the central bank, especially due to the developments in the services sector. The CNB sees wage growth structurally at around 4.5% YoY, while both this year and next year it is highly likely to be 1-2 percentage points higher. In addition, the latest figures ended up visibly above the CNB's 3.6% (in real terms) staff forecast. The wage data fit into recent CNB guidance flagging an easing pause in the near future. Governor Michl yesterday said that they might choose for interest rate stability for some time, giving the bank time to “assess the new forecast with a goal to bring core inflation slightly below 2% and overall inflation to the target.” The next meeting is scheduled for December 19. The Czech koruna at EUR/CZK 25.11 yesterday touched the strongest levels since end-September, but with no follow-through gains (currently 25.17).
•          The National Bank of Poland (NBP) yesterday as expected left its policy rate unchanged at 5.75%. CPI in November slowed from 5.0% to 4.6%, but has been higher than in H1 2024 mainly due higher administered prices of energy carriers and food prices. Domestic/services inflation is also supported by marked wage growth. Yet, demand-driven inflation is assessed to remain low, due to weakened economic conditions. NBP expects inflation to remain markedly above target in coming quarters due to the effect of earlier increase in energy prices and planned increases in excise duties and administered services prices. In the medium term inflation should return to target, but there remains a factor of uncertainty amongst others due to the impact of higher energy prices on inflation expectations. Several NBP members including governor Glapinski recently indicated that the NBP might start to discuss interest rate cuts in March. Glapinski comments on the decision this afternoon. The zloty yesterday strengthened to close near EUR/PLN 4.28 but this was probably mainly due to global factors.
 

Graphs

GE 10y yield

The ECB delivered a third rate cut in October as the outlook deteriorated and inflation is expected to reach the target sooner than thought. Another reduction in December is highly likely even though Lagarde refrained from official guidance. The path towards neutral (2-2.5%) should eventually aid an ailing economy. Growth concerns dominate short term though, with the 2% support in the 10-yr yield preparing to be tested.

 

US 10y yield

The Fed slowed the easing pace to 25 bps in November and reiterated the path to a more neutral stance is set by the economy. Recent US data suggest there’s no need for aggressive Fed support for now (25 bps steps will do). The long end surged after touching the 3.60% on Trump’s election victory. This fiscal-related steepening trend is strong but took a breather in recent weeks. 4.15% and 4.04% are tough support areas.

 

Calendar & table

Contacts