• In a session deprived of important data, technical considerations were the main driver for trading. The German 10-y yield at the open briefly dropped below the 1.77% neckline/early October low. The test is ongoing, but there was no trigger to force a real break. The technical picture of the 10-y EMU swap is slightly different as the spread between swaps and bunds narrowed during the decline in yields since early October. Even so the 10-y tested the psychological barrier of 2.50%. The German yield curve turns slightly less inverse, with the 2-y easing 5 bps and the 30-y rising 0.5 bp. The ECB today published its consumer expectations survey. It probably is only ‘secondary input’ for next week’s policy meeting. Consumers’ inflation assessment at least showed that here is still some work to do for the ECB in convincing citizens that it will be able to bring price growth back to 2.0% in a sustainable way. Inflation expectations for the next 12 months rose further from 5.1% to 5.4%. Expectations for inflation three years ahead remained unchanged at 3.0%, an ‘anchor’ still well above the bank’s target. Intra-EMU spreads of late narrowed substantially in line with the decline in LT core yields. This move continues, even as the pace of narrowing is slowing. The 10-y Italian spread versus Germany currently trades near 185 bpn, to be compared with peak levels near 250 bpn end September. US yields traded little changed as US traders joined, but a downward revision in the (albeit outdated) Q3 unit labour cost (2.4% from 3.5%), again revived the bid for Treasuries. US yields decline 7/8 bps across the curve. The US 10-y yield is setting a new correction low well below 3.50%. Risk sentiment remains fragile after yesterday’s WS sell-off as investors ponder risks for a substantial slowdown/recession. Disappointing Chinese trade data only reinforced doubts. US indices again opened modestly lower (about 0.3%). Oil (Brent $79.75 p/b) struggles to avoid further losses below $80 p/b.
• The dollar again delivers an unconvincing performance. The decline in US yields apparently more than counterbalances a fragile risk sentiment. EUR/USD (currently 1.053) in a protracted intra-day uptrend easily recaptured 1.05 barrier. Next resistance stands at 1.0595/1.0611-15. DXY also fails to build on a two-day rebound, trading at 104.88 (open 105.63) with Monday’s correction low at 104.11. Sterling trades in lockstep with the euro with EUR/GBP little changed near 0.8625.
• The Czech government approved the joint recommendation of the Ministry of Finance and the Czech National Bank not to set a date for adopting the euro yet. The Government considers the unfinished process of economic convergence of the Czech economy, especially as regards the price and wage levels where the distance from the EMU average remains significant, to be an obstacle. The Czech economy also continues to differ substantially in its structure, a factor which might cause problems in the event of the single monetary policy. Given population ageing, the long-term sustainability of public budgets is also not fully resolved. Close trade ties, a relative stable FX rate, still low long-term unemployment and a resilient banking sector speak in favour of adopting the euro, but don’t weigh strong enough. The CNB today also revealed that it sold €79mn of FX reserves last month to support CZK. It’s the lowest amount since interventions started earlier this year. From May, to October, the CNB spent a total of €25.6bn or 15.9% of total forex reserves in April 2022.
• Average UK house prices fell 2.3% in November (-0.4% in October) according to mortgage lender Halifax., the largest monthly drop since October 2008 and the third consecutive fall. The annual growth rate dropped to 4.7% from 8.2%. Over the past quarter, they fell by 1%.. The average UK house price now amounts £285,579, which is the lowest since March. Halifax Mortgages Director Kinnaird commented that the market may now be going through a process of normalisation. Some important factors like limited supply of properties for sale will remain, but the trajectory of mortgage rates, robustness of household finances in the face of the rising cost of living, and how the economy – and more specifically the labour market – performs will be key in determining house prices changes in 2023.