Markets
Today’s trading was a long drawn countdown to the publication of the US inflation release. On the financial newswires there was still a lot of analyses/debate on the options for the ECB to engineer a smooth transition for asset purchases beyond the formal end of PEPP at the end of March. However, the direct impact on (European) bond markets was limited. At least European yields didn’t decline further after yesterday’s setback. US yields continued a modest flattening trend going into the US CPI release. However, from a market point of view, it brought a ‘high profile non-event’. US headline CPI rose 0.8% M/M and 6.8% Y/Y, the fastest pace since 1982. Core inflation also rose further, 0.5% M/M to 4.9% Y/Y (from 4.6%Y/Y). However, the report was perfectly in line with expectations. Energy (3.5%) again rose sharply M/M, but this might be partially reversed in December. A new rise in prices for new vehicles (1.1%) and used cars (2.5%) also caught the eye. Markets were slightly positioned for an upward surprise. As this didn’t materialize, US yields now reversed from a bear to a bull flattening with yields declining between 0.75 bp (2-y) and 2.6 bps (30-y). Interestingly, the US 10-y inflation swap dropped about 5 bps upon the release. Investors apparently feel that enough inflation risk is discounted as the Fed tends to accelerate tapering in order to fight inflation next year with higher interest rates. German yields moving between unchanged (30 y) and +1.2bp bp (5 & 2-y). The 0.10% level for EMU 10-y swap again survives. The -0.35% barrier for the 10-y bund remains under pressure. European equites overcame earlier, mostly limited losses. US indices opened in positive territory. Some fading of the inflation hype/narrative apparently gives some comfort.
The ‘not higher-than-feared’ US inflation also triggered an admittedly mild repositioning in FX. The dollar lost earlier intraday gains. After testing the Wednesday low near 1.1265 area, EUR/USD tried to regain the 1.13 level but even that is a too high hurdle (currently 1.128). USD/JPY dropped from the 113.80 area to 1.1350. Sterling and in particular EUR/GBP was a place of almost perfect wind still. UK October production and construction data were softer dan expected, but markets consider this as outdates and look forward how the BoE assesses the impact of new corona restrictions and of the omicron variant. Probably more relevant for the BoE, the BOE/Kantar survey showed inflation expectations of the UK public for next year rising from 2.7% to 3.2% and also expectations on a longer term horizon rise further away from the 2.0% BoE target. Market didn’t draw any immediate conclusions for next week policy meeting. UK yields even ease slightly. EUR/GBP declined a few ticks to currently trade in the 0.8535 area.
News Headlines
Czech headline inflation quickened from 5.8% to 6% y/y in November, well above the upper limit of the Czech National Bank’s 1-3% range. Adjusted for indirect taxes, monetary-policy relevant price dynamics rose by a full 7% according to a statement. Inflation was about 1 ppt higher than the CNB’s autumn forecast, mainly on accelerating core inflation (7.8% y/y) amid rising costs of owner-occupied housing. The CNB says today’s reading poses inflationary risks to the autumn forecasts, which projected 7% inflation during the winter. Czech short-term rates jump 20 bps higher today, projecting a peak policy rate of more than 4% compared to 2.75% today. The Czech krone advanced vs the euro to 25.36.
Inflation in Norway came in at the high end of expectations, accelerating from 3.5% to 5.1% y/y in November. It’s the first 5%+ reading since 2008. Core measures stayed muted at 1.3%, though that’s also slightly more than the 1.2% expected. The price data serves as the final input for the Norges Bank’s meeting next week. It’s all but certain it will raise policy rates for a second time from 0.25% to 0.50%. With inflation coming in significantly above the NB’s own projections as well (3.9%), pressure may be building for a more decisive approach than the 1.7% peak policy rate projected for 2024 back in September. The Norwegian krone strengthened marginally, with some help of rising oil prices too (+1%). EUR/NOK eases from 10.16 to 10.13.
