Thursday, December 1, 2022

Daily Market Overview

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• Yesterday’s (perceived) soft speech of Fed chair Powell (slowing the pace of rate hikes to 50 bps in December) at that time triggered a sharp rally both on US bond and equity markets (Nasdaq +4.41%). Today’s reaction in Asian and Europe was much more modest/diffuse. Gains on Asian markets were mostly limited to about 1.0%, even as comments from Chinese officials suggested a less strict anti-Covid approach going forward. European equities are also lagging far behind yesterday’s US gains (0.5%-1.0%). At the same time, European yields made another substantial step lower, and at some point even went a good way to matching yesterday’s moves in the US even as the ECB still lags far behind the US in its normalization process. We didn’t see much of an EMU specific driver, except for weak October German retail sales (-2.8% M/M and -6.6% Y/Y). Whatever the reason, German yields are ceding between 9/12 bps across the curve. Money markets lowered expectations for the peak ECB policy rate to 2.75%. This afternoon, US investors/data didn’t change the course of events. Challenger job cuts jumped sharply in November (77K, mainly due to cost cutting (30k)). US October personal income (0.7%, M/M) and spending ( 0.8%) were strong while the price deflators (headline 0.3 % M/M 6.0% Y/Y; core 0.2% M/M, 5.0% Y/Y ) marginally softer than expected. Weekly jobless claims eased from 241k to 225k, but continuing claims rose from 1551k to 1608k. The data thus painted a mixed picture, but in current environment, this is enough for bond markets to continue to err to the soft side. Despite yesterday’s sharp sell-off , US yields only gain 2 bps for the 2/5 year sector. The 30-y even cedes 1 bp in volatile trading. US and European bond yields for now also ignore a second consecutive day of higher oil prices (Brent $88.4 p/b compared to a low just north of $80 earlier this week). Whatever, current positioning still might change later today with the key US manufacturing ISM to be released after the publication of this report. Markets will be keen to see whether the ISM joins last week’s sharp decline in the US PMI’s.

• Earlier, we described today’s moves as a bit diffuse and this also applies to FX markets. It’s not clear whether we should label today’s equity gains as risk-on or disappointing. Whatever the assessment, the dollar extends its decline with some cross rates event breaking relevant support levels. DXY dropped below the 105.30 area (currently 105.05). The decline in USD/JPY is even more striking. Opening north of 138 this morning, the pair already filled bids below 136. Despite today’s sharp decline in European yields EUR/USD is attacking the 1.05 big figure. Sterling even outperforms the euro with EUR/GBP (0.8575) on its way for a new test of the key 0.8560 area.

News Headlines

• Swiss inflation rose 3% y/y in November, unchanged from October as the monthly dynamic flatlined at 0%. Core inflation accelerated slightly from 1.8% to 1.9%. The EU harmonized figure came in at 2.9%, also matching the month before. It’s the tenth month in a row that inflation surpassed the Swiss National Bank’s 2% target. It strengthens the case for the SNB to lift policy rates from the current 0.5% level at their last policy meeting of the year on December 15 by at least 50 bps. Vice president Schlegel earlier this week already hinted at that, saying inflation is still too high for them. That said, it is still far below the 10% on the EMU level, thanks in part to the strong Swiss franc which dampens import prices. Today the currency loses a tad vs the euro though. EUR/CHF advances from 0.984 to 0.987.

• South African president Ramaphosa’s fate hangs in the balance. An advisory panel created by parliament found grounds for lawmakers to consider impeaching Ramaphosa over an alleged robbery cover-up at his game farm and potential violations of the constitution. Several senior officials within his African National Congress party have joined the opposition in calling for him to resign. According to people familiar, Ramaphosa is weighing this option. The incumbent president was widely popular within the ANC and the people before the scandal, allowing him to set in motion a range of reforms addressing corruption, the liberalization of the power sector and private sector infrastructure investments. It’s unclear who from the ANC would succeed him and even if someone is found, risks are that much of the reform agenda will be put on hold. Markets acknowledge the risk. A sell-off wave rolls over South African assets, including the rand. The currency gets a serious beating with USD/ZAR skyrocketing from 17.2 to almost 18 before paring losses to 17.73 currently.

Graphs & Table

USD/ZAR: rand weakens sharply as impeachment of president Ramaphosa puts reform agenda at risk.

German 10-y yield testing key 1.80% support as markets ponder CB’s peak cycle policy rate levels.

GBP/USD: cable extends gain north of 1.20. Positive noise on Brexit talks with EU helps.

USD/JPY accelerates correction as markets scale back Fed rate hike expecations.

Note: All times and dates are CET. More reports are available at which you may sign up to.

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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