US Stock Markets Extended Their Path Towards 2023 Tops

Markets

The US 2-yr yield tested the post-CPI high (4.94%) yesterday following the release of first weekly jobless claims (209k from 233k vs 227k expected) and next an upward revision to short term (1yr: 4.5% from 4.4%) inflation expectations in University of Michigan’s November consumer survey. Long term inflation expectations (5-10yr) were unchanged at 3.2% while markets expected a downward revision to 3.1%. The former is the highest level since April; the latter the highest in over a decade. These consumer expectations contrast with markets preparing premature central bank rate cuts in Q2 of next year. From a market momentum point of view, it’s nevertheless telling that yesterday’s (second-tier) releases managed to trigger a reaction. It strengthens our believe this month’s correction lower in bond yields most likely went far enough. Daily changes on the US yield curve eventually ranged between +3.1 bps (5-yr) and -1 bp (30-yr). The long end of the curve suffered from more intraday volatility via oil prices. They dropped as much as $3/b intraday (to $78.5/b) after OPEC+ delayed its planned ministerial meeting by a couple of days over diverging views on the level of production cuts. The drop lower in oil prices and (long term) bond yields didn’t last though. Technical elements played as well with 4.34% support in the US 10-yr yield (38% retracement on March-October rise) surviving ahead of the long US weekend (Thanksgiving & Black Friday). German yield changes varied between +3.9 bps (2-yr) and -3.2 bps (30-yr) yesterday. November EMU PMI surveys can today strengthen our scenario that the yield correction lower went far enough. Consensus expects marginal improvements from weak levels (43.5 from 43.1 for manufacturing and 48.1 from 47.8 for services) with likely downside risks. A failure for bonds to rally on such outcome would have a strong signaling function.

US stock markets extended their path towards 2023 tops with gains of 0.5% for major benchmarks. The (trade-weighted) dollar moved away from sell-off lows, but failed to completely hold on to momentum into the close. DXY closed at 103.92 from an open at 103.55, but drifts lower again this morning. EUR/USD closed at 1.0888 (vs intraday low of 1.0852) from 1.0911. EUR/GBP was uninspired by small pre-election tax cuts delivered in Chancellor Hunt’s Autumn statement. Today’s UK PMI’s and how they relate to EMU ones will be key for keeping EUR/GBP in the rising trend channel since September, which is our preferred scenario.

News headlines

Geert Wilders’ PVV is emerging victorious from yesterday’s Dutch (snap) parliamentary elections. With 98% of the votes counted, his far-right party is set to secure 37 seats, up 20 seats from the 2021 election. EU’s former climate chief Frans Timmermans lead a Green Left-Labour alliance and came in second with 25 seats (+8) while the liberal VVD was third with 24 seats (-10). The recently erected centre-right New Social Contract (NSC) party stormed in, gaining 20 seats. Forming a majority in the highly splintered (16 parties!), 150-seat lower house of parliament is expected to take months. While the leader of the biggest party usually becomes prime minister, it could turn out otherwise this time around as both PVV and NSC have already ruled out governing with the PVV. The Green Left-Labour alliance’s natural coalition ally, D66, is set to win only 10 sets (-14), making the formation of a left-wing government equally difficult. PM Rutte (VDD), who’s exiting Dutch politics, will stay in a caretaker capacity in the meantime.

Staying in the European lowland region, Belgian consumer confidence in November extended a gradual recovery that started this summer, the National Bank of Belgium said yesterday. The headline indicator rose from -5 to -4, the highest since the Russian invasion in March 2022. Consumers were more optimistic about the economic outlook and, to a lesser extent, the labour market. On a personal level, households slightly upgraded their expectations for their own financial situation. A downward revision in their saving intentions partially cancelled out the sharp increase recorded in October.