Markets
German Bunds sold off yesterday in a move that started on weak November EMU PMI’s and ended with Germany suspending its debt brake for (at least) another year. PMI’s remain at weak levels, suggesting the EMU economy being stuck in the mud. A sixth consecutive sub-50 reading for the composite gauge seals the debate on a technical recession for H2 2023. Falling new orders, lower output and running down of inventories for the first time in three years resulted in falling employment. Small job gains in services failed to cover for big losses in manufacturing. Overall price pressure accelerated again, solely driven by services as a result of above average inflation. For the first time since the October/November rate skips by the ECB, Fed and BoE, markets didn’t grab the opportunity (of weak data) to extend the bond correction higher. It suggests that for now, the frontrunning on Q2 2024 global rate cut bets went far enough. In our view, these expectations don’t align with central bank communication and are still too premature. ECB Villeroy for example said that the ECB in his view won’t raise rates again, but simultaneously stressed that the 4% plateau will likely stay at least for the next several meetings and the next few quarters. Earlier this month, he also suggested to end PEPP-reinvestments sooner than currently planned (“at least until end 2024”). The Bund sell-off accelerated as last week’s constitutional ruling on illegal off-balance sheet spending pushed the German government to suspend the debt brake (0.35% of GDP of new net spending). The decision in theory gives more leeway for additional spending in case of economic downturn and also increases moral hazard behavior on public finances in other EMU countries. German yields added 2.3 bps (2-yr) to 5.8 bps (10-yr). The single currency failed to profit from the interest rate support with EUR/USD spending most part of the trading day just below 1.09. Sterling marginally outperformed with EUR/GBP closing at the 0.87 big figure on diverging PMI’s. UK November surveys outperformed EMU ones with a strong rebound in services pushing the composite UK gauge back above the neutral 50 mark.
Japanese national inflation figures accelerated in October (2.9% Y/Y from 2.8% Y/Y for the BoJ’s preferred ex fresh food gauge), bolstering the case for the BoJ to up its policy normalization efforts. JPY is marginally stronger at 149.40. US investors return from their Thanksgiving holiday, but volumes remain traditionally low on Black Friday. US November PMI’s are the key focus. We hope to a see a similar market reaction as yesterday on EMU PMI to confirm our case that the upward bond correction ran its course.
News headlines
New Zealand is about to have a new government. The National Party, led by incoming prime minister Luxon, sealed an agreement on Friday with ACT and the First party. The cabinet is to be sworn in next Monday and has announced a range of measures including in 2018 cutting personal income taxes but also to remove the central bank’s (RBNZ) dual mandate on inflation and employment introduced by Labour to narrow it down to just price stability. The RBNZ’s annual inflation target ranges between 1-3% with a focus on the 2% midpoint. It is currently required to reach this “over the medium term” but the coalition government is taking advice to replace this by time-specific targets. The previous New Zealand government sought similar advice last year. The central bank then did not support the idea, arguing that monetary policy works with lags that can change over time. It is not unheard of in advanced economies, however. The Bank of Canada seeks to achieve its inflation aim in six to eight quarters.
The European Commission is about to conclude its assessment of Hungary’s amended post-pandemic recovery plan aimed at addressing the energy crunch following the Russian invasion. If approved by the EU finance ministers, Hungary will have access to as much as 20% of the €3.9bn in loans and €700 mln in grants combined, or €920 mln in total. These funds are non-conditional, meaning the bulk of the recovery funds as well as billions of other (cohesion) resources are still blocked over a long-running legal battle between Hungary and the EU over the rule of law and graft concerns. The forint yesterday outperformed regional peers still. EUR/HUF dipped below 380.
