Dollar Stays in the Sefensive

Markets

US markets on Friday and after Thanksgiving joined the rebound in yields in Europe on Thursday. Investors apparently found that enough frontloading on (Fed & ECB) rate cuts had been discounted. Eco data didn’t provide much counterarguments. German IFO business confidence rose slightly (87.3 from 86.9), the third consecutive gain. Still, IFO concluded the economy is stabilizing at a low level. US November PMI’s showed a similar picture. The composite index suggests marginal growth (50.7, unchanged). Services improved slightly (50.8 from 50.6), but manufacturing dropped back in contraction territory. Both manufacturing and services cut jobs. On prices, S&P mentions that selling prices ticked up slightly, but price rises remained subdued relative to the average over the last three years and that it was consistent with a rate of increase close to the Fed’s 2% target. Still this assessment didn’t alter the turn north in yields. US yields added between 6.26 bps (10-y) and 4.9 bps (2-y). German yields gained between 2.0 bps (5-y) and 3.1 bps (30-y). For now, the test of the 4.34% area and the 2.50% in respectively the 10-y US (4.49%) and German (2.64%) yields is rejected. Equities didn’t show big directional moves, but mostly held their composure (Eurostoxx50 +0.25%; S&P 500 +0.06%). The dollar couldn’t build on the bottoming out process that tentatively started earlier last week. DXY dropped back from the 103.80 area to close near 103.40. EUR/USD finished the week near 1.0940. USD/JPY lost marginally (149.44), but stays away from recent highs just below 152. Sterling was in good shape. After a better than expected PMI on Thursday, a bigger than expected improvement in GfK consumer sentiment trigger a further GBP rebound. EUR/GBP dropped below 0.87 (close 0.868).

This morning, Asian equities mostly trade with losses of 0.5%-1.0%. Profits at China industrial companies eased substantially to 2.7% Y/Y in October from 11.9% in September, suggesting an underlying deflationary momentum and sluggish growth. US yields still gain marginally. The dollar stays in the defensive (DXY 103.30; USD/JPY 148.95). There are only second tier eco data today. ECB’s Lagarde speaks in the EU Parliament. The US Treasury sells $54 bln 2-y Notes and $55 bln 5-y notes. Later this week, US consumer confidence (Conference Board) is scheduled for release on Tuesday. German, Spanish and Belgian inflation data on Wednesday will give a preview for the EMU release expected one day the later. On Thursday, markets will also keep a close look at the US October PCE deflators. On Friday, the US manufacturing ISM index will be published, but the payrolls will only be released December 8. We look out whether the bottoming out process in core yields is confirmed. The dollar looks fragile with EUR/USD 1.0960 at risk. A drop of USD/JPY below 148.40 might be another sign of the greenback losing some further momentum.

News & Views

Rating agency Moody’s raised the outlook on the Czech Republic’s Aa3 rating from negative to stable. The decision is primarily driven by the significant reduction in risks related to Russian gas supply which were the key driver of the negative outlook in August 2022. The Czech Republic became independent from Russian gas earlier this year with gas demand from firms and households structurally decreasing as the country achieved a full energy substitution by alternative sources. The stable outlook is also supported by the fiscal consolidation which will stabilize the debt burden and by the local economy’s limited exposure to the risk of economic scarring due to structurally higher energy prices. CZK is untouched by the news this morning with a generally stronger euro lifting EUR/CZK away from the 24.30/40 support area.

The UK House of Lords economic affairs committee released an audit report on the Bank of England. It called for a significant reform of the UK central bank’s internal culture, governance and appointment process after the BoE like most other central banks underestimated inflation risks in 2020 and 2021 resulting in a delayed response. Inadequate forecasting models and all to similar profiles of BoE members are amongst topics raised which need changing. The report recommended that parliament should conduct an “overarching review” of the BoE’s remit, performance and operations every five years. The BoE will respond formally in due course.