• Yesterday’s session was a short one with the US absent for Thanksgiving. European stock markets closed with gains between 0.4-0.8%. European/German bonds advanced in a catch-up move with a late-session UST rally the day before. ECB’s Schnabel cut the run short though. The influential German board member said European fiscal policies and incoming data so far suggest that the room for slowing down the tightening pace remains limited. Dutch ECB governor Knot earlier also warned that large-scale fiscal policy can lead to inflation. German yields at the short end pared losses to 2.8 bps. Longer tenors eased 8-8.3 bps still with the 10y yield losing June interim high support at 1.927%. EUR/USD held a tight sideways pattern. The pair finished slightly higher at 1.041. Sterling had a good run. Bank of England MPC member Ramsden sided with chief economist Pill, saying additional rate hikes are necessary to keep inflation expectations anchored. He downplayed central bank scenario’s projecting inflation below target in two years even with the policy rate held stable at the current 3%. Gilts underperformed with gains up to 7.9 bps in the 2y. The very long end (30y) rose to the same extend after the BoE formally announced it will wind down its financial stability gilt purchases made between Sep 28 and Oct 14. EUR/GBP lost the upward sloping trendline (Aug-Oct) and came close to an (inevitable) test of 0.8567 neckline support. Cable (GBP/USD) extended gains to 1.211. The Japanese yen closed at the strongest level since early September (USD/JPY 138.54) while the Swedish krone (EUR/SEK 10.83) profited from the Riksbank’s 75 bps rate hike to 2.5% and higher expected terminal rate.
• FX markets in Asian-Pacific dealings trade quietly this morning. Stocks trade mixed with the Antipodeans outperforming. In China/Hong Kong markets are weighing record Covid cases (and expanding community lockdowns) vs upcoming monetary stimulus. The State Council issued a statement earlier this week that tools “such as a RRR cut” will be used “in a timely and appropriate manner”. This is usually followed by an actual cut by the PBOC some days after. US cash bond markets reopen with yields declining between 1.7 bps (30y) to 4.9 bps (2y).
• US financial markets reopen today but only for a short session, reducing liquidity for a second day straight. Unlike yesterday, there are no smaller central bank meetings nor high-profile central bank speakers scheduled that could spice up the session. Forget about today’s lackluster trading session and let’s focus on next week instead. ECB President Lagarde appears before the Committee on Economic and Monetary Affairs for a hearing on Monday while Fed chair Powell speaks on November 30. European CPI’s are due that same day, serving as key input for the ECB December meeting and the US releases the monthly labour market report next Friday.
• Japanese inflation, as measured by Tokyo CPI (one month ahead of national CPI), accelerated more than expected in November from 3.5% Y/Y to 3.8% Y/Y for the headline reading and from 3.4% Y/Y to 3.6% Y/Y for the ex-fresh food gauge (eyed by the BoJ). Stripping out energy as well came in at 2.5% Y/Y. Tokyo inflation this way hit the fastest pace since April 1982. Processed food prices (6.7% Y/Y) and the weaker yen added to price pressure. The numbers add pressure to BoJ governor Kuroda’s view that cost-push inflation is only temporary and make it tougher to defend the Japanese central bank’s ultra-easy monetary policy. Japanese government bond yield rise by 3-4 bps this morning at the 5yr+ part of the curve. The yen fails to build on his recent momentum after bouncing off the mid-November low yesterday (137.68).
• Spanish parliament approved next year’s budget, with a record spending cap op €198.2bn, in a win for the minority coalition of PM Sanchez. Next year’s budget will increase social spending by 11% to a record €266.7bn, bolster pensions by around 8.5%, and increase civil servant wages by 3.5%. Government spending should deliver 2.1% growth next year with the budget deficit shrinking from 5% of GDP this year to 3.9% next. Spain’s lower house also approved a plan to impose windfall taxed on banks and energy companies. Both bills will now be sent to Spanish Senate for final approval.
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 1.95% calls for a return towards the 1.82%/1.77% 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 5% early next year and remain above a neutral 2.5% over the policy horizon. A below-consensus CPI print strengthened some Fed members call to slow down the tightening pace, triggering a strong correction. The move below the neckline of the double top formation at 3.91% suggests a return to 3.64% in first instance.
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. But as dollar fatigue kicked in, EUR/USD finally left the strong downward trend channel since February. After a first failed attempt, the pair is again forcing a break through resistance around 1.0341/50/68.
The new UK government’s fiscally conservative approach brought calm to the market, sterling included. But still-yawning twin deficits and rising risk premia will continue to weigh on the UK currency longer term. The Bank of England stepped up its tightening with a 75 bps rate hike, but warned simultaneously that UK money market expectations about peak cycle are way too aggressive. EUR/GPB 0.856 serves as important support.
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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