Sunset Market Commentary

Markets

Core bonds strengthened today and in doing so erased part (US) or much of the two-day losing streak at the end of last week. US Treasuries underperformed as investors await the upcoming double auction. Treasury is selling $54 bn 2-y notes and $55 bn 5-year notes in a 1.5 hour timespan later today. Yields decline 0.8-1.7 bps. The Bund was trading a bit heavy before a late-morning rally kicked in. German rates currently drop 5.3-8.2 bps with the belly outperforming the wings. ECB’s Lagarde prepared remarks for the European parliament entailed nothing new. She said the economy is likely to remain weak for the rest of the year and that the job markets is showing some signs of easing even as wage pressures remain strong. However, given the considerable uncertainty on the inflation outlook and the fact that it may tick up again in coming months, it’s not the time to declare victory yet. Lagarde did say the central bank would probably discuss PEPP “in a not too distant future”. UK gilt yields also drop several basis points, to the tune of 4.2-6.3 bps. Bank of England governor Bailey again resisted market speculation for quick rate cuts. These are “unlikely” for the “foreseeable future”. He said the recent sharp drop in inflation to 4.7% was good news but warned that getting to the 2% target is “a game of two halves”. The first half was the easy part with large base effects pushing CPI down basically automatically. “The rest of it has to be done by policy and monetary policy”, he added. Bailey aired similar comments already last week. Together with the unexpected return of the composite/services PMI in expansion territory on Friday, UK money markets pushed the timing of a first full cut further in time from June 2024 early last week to August today. Stock markets seem to no longer benefit from falling core yields with the likes of the EuroStoxx50 (-0.1%) and Wall Street (about -0.2%) trading with moderate losses.

EUR/USD’s early morning test of the 1.096 resistance level failed, triggering marginal return action lower. The pair is currently hovering around opening levels of 1.093. The trade-weighted dollar index fell to 103.32, closing in on last week’s – and by extension three-month – lows. The Japanese yen is outperforming in the G10 area. USD/JPY eases to 148.86, EUR/JPY drops to 162.74. Sterling is better bid against the two majors. Cable (GBP/USD) rises to a two-month high of 1.262. EUR/GBP is extensively testing support at the 38.2% retracement (0.866) of the Aug-Nov rally.

News & Views

The Confederation of British Industry (CBI) published the results of its quarterly CBI Distributive Trades Survey. Retail sales volumes fell in the year to November, but at a slower pace than last month (weighted balance of -11% from -36%). This trend might continue in December (-6%) and firms expect their business situation to improve slightly over the next three months (+4% from -14% in August). They are inclined to reduce investment in the year ahead (compared to the past 12 months) although at a slower pace than in August (-11% from -25%) while employment is anticipated to be broadly unchanged (+1%) in the next month following a reduction in headcount in the year to November (-11%). Retail selling prices continued to rise at a rapid pace over the past year (+73% from +73% in August) with selling prices expected to maintain a similar rate of growth next month (+72%). CBI commented that last week’s Autumn Statement by the Chancellor didn’t deliver a reprieve from next year’s hike in business rates which leaves many retailers with another increase in costs at a time when they are least able to afford them.

The Hungarian GKI economic sentiment index indicator increased from -17 to -15.4 in November. The increase was thanks to an improvement in business confidence (-7.9 from -10.5) whereas consumer confidence ticked back from an 18-month high (-36.7 from -35.6). The latter was mainly due to a deterioration in the own financial situation over the past 12 months. On the business side, firms’ employment expectations improved and their plans to raise prices declined compared to October. On a sectoral level, best improvements came in industry and especially business services.