Markets
Energy-related base effects caused significant slowdowns in headline inflation figures for the likes of Spain, Belgium and Germany, making way for a downward surprise in today’s EMU reading. German Bunds temporarily rallied, but failed to stick to intraday gains. German yield changes eventually ranged between -1 bp and -2.5 bps with the belly of the curve outperforming the wings. US Treasuries underperformed despite a brief uptick around the release of the US Treasury’s quarterly borrowing statement. They cut net borrowing for the October-through-December quarter from an estimated $852bn in July to $776bn (still a record for a Q4 quarter). The end of December Treasury cash balance prognosis is unchanged at $750bn. The reduction is partly due to the magnitude of deferred tax receipts coming from states that had been granted extensions due to natural disasters. For the Jan-Mar 2024 net borrowing is estimated at $816bn with a cash balance at the end of $750bn as well. On Wednesday, the Treasury publishes its new refunding statement. Today’s eco calendar is lengthy (EMU GDP, CPI, Chicago PMI, employment cost index, consumer confidence), but we don’t expect it to leave sustained traces on markets ahead of tomorrow’s Fed.
The Bank of Japan marginally tweaked its Yield Curve Control policy this morning. In July, they doubled the maximum tolerance band around the 0% yield target for the 10-yr Japanese from 50 bps to 100 bps. That 1% was a hard limit which would be defended at all cost. From now on, the 1% turned into more of a “reference”, allowing a more flexible approach and space to breach the 1% mark. The BoJ will continue to conduct bond purchases below/at/above the target level. The Japanese 10-yr bond yield this morning trades at 0.95%, at its highest level in over a decade. Backing the new policy change are updated (core) CPI forecasts. The BoJ raised them for fiscal years 2023 (2.8% from 2.5% in July), 2024 (2.8% from 1.9%) and 2025 (1.7% from 1.6%). BoJ governor Ueda pointed to cost-push inflation and higher oil prices for the revisions. Meanwhile they continue carefully monitoring the wage-price cycle. It’s the first time in over 30 years that Japanese inflation would be above the central bank’s 2% target for three consecutive years (FY 2022 as well), creating space for the BoJ to go even further on its slow normalization quest (scrapping YCC and/or getting rid of negative policy rates). Markets hoped for a bigger step by the BoJ with the Japanese yen paying the price. USD/JPY rises back above the 150-mark (150.30 from 149.10). In October of last year, the BoJ conducted huge FX interventions to defend the currency after breaching that mark.
News& Views
Official Chinese October PMIs came in to the weak side of expectations. The composite indicator fell from 52 to 50.7, the lowest level this year so far, with sentiment across the private sector deteriorating. The manufacturing gauge unexpectedly fell in contraction territory again (49.5), erasing the September uptick. New orders (49.5) and reduced output (50.9) drove the decline. The non-manufacturing sector only narrowly expanded, with the PMI easing from 51.7 to 50.6 vs 52 expected. Key indicators including new business (46.7 from 47.8) and employment (46.5, down 0.3 points) remain subpar. Business activity expectations hit a new YtD low at 58.1. Chinese bourses this morning are among the worst performers. The yuan gapped lower at the open this morning. USD/CNY wiped out yesterday’s marginal losses to trade around the recent highs of 7.317.
The World Bank in its quarterly Commodity Markets Outlook warned oil prices could surge to between $140 and $157 per barrel if the conflict in the Middle East escalates. If sustained it “inevitably means higher food prices”, the Worlds Bank’s deputy chief economist Kose said. It is the worst case scenario where global oil supply shrinks by 6 to 8 million barrels if key Arab producers including Saudi Arabia would cut exports. Opec’s Arab members did so back in the seventies in a move targeting the US and other countries that supported Israel in the Yom Kippur war. Under the World Bank’s small and medium risk scenarios, prices may rally to $102-121 per barrel. The baseline forecast is for overall commodity prices to drop 4.1% next year and oil prices to an average of $81 per barrel. This compares to a projected $90/b in the current quarter.
