Friday, December 2, 2022

Daily Market Overview

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• SCREEEEEECH! The core bond rally came to a screeching halt at the end of this week. In defiance of the slightly disappointing ADP job report, November US payrolls easily surpassed consensus estimates. US yields propel between 8.9 bps (30y) and 13.5 bps (2y) higher. The critical 10y yield support at 3.5% was saved by the bell. German yields in the US slipstream swapped intraday losses of more than 6 bps for gains up to 3 bps. Over there, the 10y was at risk of losing 1.77% support. But that October interim low lives to fight another day. US Job creation in November came in at 263k vs 200k expected. This was accompanied by an upward revision for October by 23k. Job growth remains thus far in excess of the pace needed to accommodate population growth over time, which Powell during his speech on Wednesday estimated at 100k per month. The unemployment rate stabilized at a historically low 3.7%. The still-tight labour market puts upward pressure on wages, intensified by a rather low participation rate (fell from 62.2% to 62.1%). Wage growth accelerated from 0.5% m/m to 0.6% to be up 5.1% y/y. It’s the first year-over-year increase in three months and follows an even upwardly revised 4.9% in October. Powell on Wednesday outlined four conditions for inflation to return to the 2% inflation target. Three of them are (close in being) fulfilled. The fourth reads: “Finally, the labor market, which is especially important for inflation in core services ex housing, shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2 percent inflation over time”. Today’s job report surely does not meet this final prerequisite and suggests the inflation fight may take longer than some expect. To this end, it serves as a reality check for markets who were running way ahead of themselves in seeing the US central bank lift rates to no more than 5% and expecting rate cuts already in the second half of next year – disregarding guidance from almost every Fed member. Food for thought as they head into the weekend.

• The dollar snapped a heavy two-day losing streak. DXY rebounded above the 105(.3) support. A weekly close above that level may be important from a technical point of view. EUR/USD aborts its adventure north of 1.05 to trade around 1.047. Cable limits losses to just below 1.22, with a little help of the 200dMA. Sterling against other currencies trades muted, including EUR. EUR/GBP is changing hands just south of 0.86 with 0.857 serving as important support. On other markets, equities staged a knee-jerk drop post-payrolls. European stocks ease half a percent. Wall Street opens 0.7-1.3% lower.
News Headlines

• According to the Czech statistical office, Q3 GDP contracted 0.2% Q/Q to be still 1.7% higher compared to the same quarter last year. The  outcome was slightly better that the first estimate and less negative than the Czech national bank expected. The details show a sharp contraction in household consumption (-2.4% Q/Q), which the CNB attributes to a sharp fall in real income and a worse sentiment among consumers. Government consumption also declined more than the CNB expected (-0.8% Q/Q and -1.2%Y/Y). Still, these deviations were overall slightly outweighed by a higher-than-expected contribution of net exports. Growth in both exports and imports was faster than forecasted. Gross capital formation (-0.4% Q/Q, 5.1% Y/Y) was as the CNB expected, with the quarterly decline reflecting a deteriorating situation of companies. According the CNB autumn forecast the Czech economy will switch to a year-on-year decline end this year and then continue to decline for several quarters. In whole-year terms, Czech output next year will lower than this year. A positive contribution of net exports and recovering household consumption will be the main factors behind renewed economic growth in 2024. After losing modest ground this week, the koruna today trades little changed near 24.37.

• At the same time of the all-important US payrolls reported, Statistics Canada also reported its monthly labour market data. After an impressive net gain in employment of 108.3k in October, job growth slowed to the expected 10k. The unemployment rate declined from 5.2% to 5.1%, but coincided with a slight decline in the participation rate. Growth in the average hourly wages of employees remained above 5% for a sixth consecutive month, rising 5.6% Y/Y. The loonie lost modestly against the USD (USD/CAD 1.348) but this was mainly due to strong US payrolls.


Graphs & Table

US 10y yield support at 3.5% saved by the bell

EUR/USD: dollar snaps heavy two-day losing streak after strong payrolls makes markets ponder the Fed pivot

Stellar gold run hits resistance around $1800 as US/core bond yields reverse course in a daily perspective

S&P500: taking out August correction high proves too tough nut to crack for now

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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