Tuesday, December 6, 2022

Daily Market Overview

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• Your average daily soap opera tonight will most likely hold more plot twists than markets do today. European equity markets whipsawed in a tight range just below the zero point and WS opens flat in a session devoid of news and economic data. Core bonds gained with US Treasuries underperforming Bunds. US yields initially gave back some of yesterday’s post-ISM gains but erased those in early US dealings. The long end slightly outperforms, causing the inversion to deepen further. German yields drop 5.2 to 6.3 bps in the 2y-10y segment even after gapping higher at the open in a partial catch-up with the US yesterday. The 1.77% support area in the 10y yield is just too much of a technical lure. Swaps outperform Bunds to the tune of a basis point or two. If any, other than a Lane speech we’ve seen little to explain for the European outperformance relative to the US. The ECB chief economist said he was fairly confident that inflation is near its peak. There could be some extra inflation early next year but in the spring/summer of 2023 there should be a sizeable drop. While he expects that more rate increases are necessary, he said that much has been done already. Frankfurt has raised rates since July by 200 bps. Lane did acknowledge that bringing inflation back to 2% from the current high levels will take time, amongst others because he expects second round effects coming from bigger-than-usual pay increases which will drive inflation next year and in 2024.
• Over to FX! Where not much is happening either. EUR/USD doesn’t know which side to pick around the 1.05 big figure. The trade-weighted dollar is testing support from the 38.2% retracement of the 2021-2022 advance at 105.01. USD/JPY eases marginally to 136.28. Sterling is keeping low profile in the EUR/GBP 0.86 environment. In Central-Europe, the Hungarian forint underperforms regional peers. EUR/HUF is attacking recent highs around 414.6. This level must hold for the forint to prevent a technical return to the 430 all-time low. Forint weakness emerges amidst uncertainty around the disbursement of funds totaling over €13bn. The EC last week recommended member states to freeze €7.5bn of regular budget resources until Hungary implements a range of antigraft reforms. It also suggested to already approve Hungary’s Covid recovery plan as to avoid part of the €5.8bn grants being permanently lost but withhold the payout until more rule-of-law targets are met. The decision would be made today but is again postponed, to December 19. It’s no secret that the EU also uses the funds as leverage to persuade Hungary to drop its opposition to additional aid for Ukraine.
News Headlines

• Czech October retail trade declined 1.8% in real terms to be 9.4% lower Y/Y (was -5.3%Y/Y  in September). Sales of non-food goods decreased by 2.8% M/M and sales of food by 1.0% M/M, whereas sales of automotive fuel increased by 0.6%. The decrease in Y/Y sales already lasts from May this year. According the Czech statistical office ‘year-on-year decrease was reported by all main assortment types of specialised stores with non-food goods, except for stores selling dispensing chemist, medical and orthopedic goods. Retail sale via mail order houses or via Internet continued to decrease already for the tenth successive month.’ The slowdown in domestic demand supports the case for the Czech national bank to pause its hiking cycle with the policy rate currently at 7.0%. The krona weakens slightly today trading EUR/ CZK 24.32.
• GDP growth in South Africa in Q3 turned out to be surprisingly strong. Activity grew by 1.6% Q/Q and 4.1 Y/Y, coming after a quarterly contraction of 0.7% in Q2. Strong Q3 growth also resulted in the South African economy now again surpassing the level from before the COVID-19 pandemic. Measured by production, 8 out of 10 industry sectors contributed to growth, with the biggest contribution (0.5%) coming from agriculture where activity increased 19;2. Measures by spending, household consumption decreased by 0.3% Q/Q (-0.2% contribution). Major positive contributions came from inventories (0.7%) and net exports (0.6%) and to a lesser extent from capital formation +0.3%). The rand rebounds slightly today trading at USD/ZAR 17.29, from an open 17.43.

Graphs & Table

EUR/HUF attacking recent highs amid forint weakness. Break paves the way for a return to all-time (forint) lows.

European 10y swap yield meets resistance from June high.

Brent oil ($/b): Russian oil boycott leaves few marks on international/European reference for now.

EuroStoxx50: sharp October/November rally is showing signs of exhaustion.

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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