• When the Fed wants to make some last-minute changes to market positioning going into a Fed policy meeting, they often make use of their favorite news media, the Wall Street Journal, to dot the I’s and cross the T’s. It didn’t surprise us to read exactly that today. “Brisk wage growth could lead officials to consider raising their policy rate above 5% in 2023 to fight inflation”. The message strokes with Fed guidance of late, but is completely ignored by markets. Last week’s speech by Fed chair Powell and stronger-than-expected payrolls even achieved the opposite. The article floats two possible strategies for proceeding. One would be to quickly raise rates above 5% and then lower them right away when the Fed should have gone too far. The other is to go slower and “feel your way a bit”, but hold on to that high level for longer and not loosen policy too early. The latter is what Fed Chair Powell has in mind. The new (median) policy rate projection could be increased to 5.25% in the new dot plot, compared to 4.75% currently, with the higher level being maintained for longer. US money markets currently discount a 5% peak in H1 2023, but a reduction to 4.5% by year-end. The WSJ article clearly stipulates that the bigger mistake the Fed could make would be undershooting it and failing to get inflation under control. If the Fed’s aim was to change current market positioning somewhat, they (at least for now) failed to really do so. In a rather dull European trading session, US yields add 3 bps to 5.8 bps with the belly of the curve underperforming the wings. German yield changes vary between +1.6 bps (2-yr) and -2 bps (30-yr) as they still had to catch up with the fall in US yields after European close last Friday. EUR/USD flipped sides around the 1.0550 handle without strong preference. We retain comments by ECB Makhlouf who said that the ECB will probably also shift from 75 bps to 50 bps rate hikes in December. That could mark the start of consecutive such moves as it is premature to be talking about the end-point for policy rates. On the topic of the future balance sheet roll-off, he favours it to start slowly at the end of Q1 or early Q2, leaving room to accelerate afterwards. The most outspoken USD move came this morning as USD/CNY slipped below 7 for the first time since September after China loosened some of its strict Covid-rules. Where this news managed to boost Asian bourses, it couldn’t inspire European ones. Main indices lose around 0.5% today. EUR/GBP bounces off key support at 0.8559/67 in a technically-inspired move.
• Turkish inflation slowed in November to 2.88% M/M and 84,39% Y/Y (3.54% M/M and 85.51% in October). Core inflation (excluding food and energy) slowed to 68.9% from 70.5%. Except for clothing and footwear (-1.42% M/M) all main groups in the consumer basket still show a rise compared to October. In Y/Y terms, the slowest rise was seen in communication (35.87%) with the highest readings for food and non-alcoholic beverages (102,55%) and transportation (107.03%.). The decline of the lira recently shifting into a lower gear helps to slow inflationary dynamics. Base effects from very high monthly rises a year ago probably will further reduce inflation in the months ahead. However, there is no perspective for inflation to return to the 5% CBRT target in the foreseeable future. A stimulative fiscal and monetary policy ahead of the 2023 elections might even fuel inflationary tendencies. PPI inflation also slowed to 0.74% M/M and 136.02% Y/Y (From 157.69%). The lira is holding stable against the dollar (USD/TRY 18,639) and eases slightly against the euro (EUR/TRY 19,65). Real yields remain extremely negative after the CBRT cut the interest rate to 9.0%.
• Hungarian retail sales eased more than expected in October, suggesting a slowdown in domestic demand. Sales volumes were only 0.6% higher compared to the same period last year. In a monthly perspective, sales (calendar-adjusted) decreased by 5.6% in food shops and 0.9% in non-food retailing. However automotive fuel retailing rose 19.7% M/M. Over the January-October period, the retail sales volume was still 7.0% Y/Y. The forint is losing modest ground (EUR/HUF 411,75) but stays with a short term consolidation pattern between EUR/HUF 398 and 415. Trading in the currency remains subject to uncertainty on the solution of ‘the rule of law dispute’ with the EU which is a condition to free blocked EU funds for the country.