Click here to read the PDF-version of this report.
• European inflation eased a little more than expected from 10.6% to 10% in November vs 10.4% expected. The downside surprise wasn’t really one after several national readings flagging the possibility of this to happen. Energy and services costs helped ease the number, even as food prices rose more quickly. Markets seemed to focus more on the core reading instead as ECB governors, including de Guindos on Tuesday, recently shifted the focus from headline to core inflation. This gauge stabilized at 5% y/y, suggesting still-strong and unabating underlying price pressures. It turned out to be the dominant element in the market reaction. European/German yields jumped 5 bps intraday after the release even as today’s figures cemented the case for a 50 bps (instead of a third 75 bps) rate hike by the ECB. Net daily changes currently range between 0.3 bps (30y) to 4.5 bps (5y) for German bonds. Swaps outperform Bunds by about 2 bps across the curve. The ECB reported that it will pause APP and PEPP reinvestments between December 21 and January 1. While that probably entails only a limited amount (explaining the muted market reaction), it still grabbed some headlines with the central bank poised to outline a quantitative tightening blueprint in December. Other economic data contained the US ADP job report serving as a preview on the official payrolls report on Friday. November job growth amounted to 127k, a deceleration from the 239k in October. While also less than the 200k forecasted, US yields extended an earlier advance, bringing daily gains between 2.1 bps (30y) to 5.7 bps (2y). This may have come on the account of the US’ second quarterly GDP and PCE reading which were published at the same time. Q3 GDP growth was revised upwards from 2.6% q/q annualized to 2.9% on the back of stronger than previously assumed personal consumption. Core PCE was lifted from 4.5% to 4.6% q/q.
• The FX market is dominated by three currencies today. The dollar and the Japanese yen make up two out of the three. Both are trading on the backfoot and are the weakest for the day in the G10 landscape. The trade-weighted DXY eases from 106.82 to 106.43 currently. EUR/USD erases yesterday and Monday’s losses to change hands close but below 1.04. USD/JPY is a balance of weakness narrowly tilting in favor of the USD. The pair rises to 139.28. The Norwegian krone outperforms major peers after the Norges Bank said it will lower purchases of FX to 1900 million NOK in December (about half of what was expected and bought in November). It was an unexpected decrease and the NB didn’t explain why. However, the drop in energy prices – meaning lower inflows which are in turn used to fund the budget deficit – is seen as a key reason. EUR/NOK fell from 10.33 to 10.25 after the NB announcement.
• “In short, no funds will flow until the essential milestones are properly implemented”. EC Vice-President Dombrovskis was clear in his press conference concerning EU funds towards Hungary. EC Justice Commissioner Reynders added that there’s no partial payment for partial fulfillment. The EU did recommend to conditionally approve Hungary’s Covid-recovery plan so that it won’t lose access to €5.8bn from this specific source after year-end. Funds will only flow on condition of implementing reforms concerning graft and the erosion of the rule of law. Separately, the EU will freeze €7.5bn of funds from the multi-annual EU budget until it enacts a set of rules aimed at rooting out graft in the government. The forint weakened again today with EUR/HUF moving towards 410.
• The Swiss KOF leading indicator (November) unexpectedly slipped for a fifth month running to its lowest level since July 2020: from 90.9 to 89.5. The outlook for the Swiss economy therefore remains subdued in the coming months. The new downleg was primarily driven “other services”. “Accommodation and food service activities” and “private consumption” are also weakening. “Foreign demand” records a slight positive development. The picture in the goods producing sector (manufacturing and construction) is mixed. Production capacities, inventories and the competitive situation are the main contributors to the overall negative development. By contrast, indicators assessing the situation for intermediate products, obstacles to production and the order backlog are sending out positive signals. On an industry level, worst data came from metals, followed by wood and paper products and machinery and vehicle manufacturing.
Graphs & Table
EUR/HUF: forint gets a hit as EU toughens up threats vis-à-vis Hungary. No reforms means no funds.
EUR/NOK: krone rallies after Norges Bank says it will buy only half of the expected FX in December as energy revenues disappoint.
USD/CNY: lingering hopes for a Chinese reopening post zero-Covid vastly outweigh disappointing November PMIs.
European 2y swap yield testing lower bound of (yield) bullish closing triangle. Topside break incoming after the ECB December meeting?!
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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