Sunset Market Commentary

Markets

This morning, (Asian) markets were ‘unsettled’ as US president-elect Trump via his ‘Truth’ social network announced additional tariffs on Canada and Mexico (25%) as he assesses they don’t do enough to stop what he calls the ‘invasion of drugs’ and ‘illegal aliens’ into the US. Also China will face an additional levy of 10% for not doing enough to stem the inflow of drugs and migrants to the US. At first instance, the announcement of these rather unexpected, basically non-economically driven tariffs firmly questioned yesterday’s market hope that the nomination Scott Bessent as US Treasury Secretary could be a harbinger of a more pragmatic approach from the Trump 2.0 administration. In a first reaction US yields and especially the dollar tried to reverse some of yesterday’s setback, but as was the case recently, the Trump trade (higher yields and higher dollar) failed to regain full momentum. US yields currently adds between 1.0/2.0 bps. In an interview on Bloomberg, Fed’s Kashkari indicated that tit-for-tat action on tariffs could be inflationary, but he still saw it reasonable to consider a December rate cut. Europe wasn’t directly affected by the Trump tariffs but he still has plenty of time to also reshape its trading relationship/practices with the EU. At least for now, further declines in EMU yields were limited. German currently show changes of less than 1 bp across the curve. European equities show most declines (EuroStoxx 50 -0.35%). US indices open mixed.

After finishing this report, the US consumer confidence (Conference Board) and the Minutes of the previous Fed meeting will be published. The US Treasury will sell $70 bln 5-y Notes.

On FX markets, the dollar failed to hold a brief ‘Trump-related’ spike higher at the opening. DYX trades little changed in a daily perspective (106.9) and this is also the case for EUR/USD (1.0495). The yen again outperforms with USD/JPY trading near 153.5 (from 154.23). The Canadian Loonie was hit the hardest by the Trump tariff announcement. USD/CAD is trading north of 1.41; at levels not seen since spring 2020. The Mexican peso (MXN) is also facing an uphill battle, but USD/MXN (20.583) for now holds just below the TYD top (20.8 area).

News & Views

Deputy governor of Sweden’s Riksbank Anna Seim touched on the topic of the neutral rate during a central bank seminar. Despite the inherent uncertainties associated with this theoretical construct, central banks use it as a gauge to help determine whether policy settings are either stimulative or restrictive. An update of the estimated level was due since the last one dated from 2017. Based on international studies, other central bank studies, pricing and surveys from financial markets and model-guesstimates, Seim concluded that “The long-term neutral interest rate, and thus the long-term normal policy rate, is probably between 1.5 and 3 per cent.” This is one percentage point lower than the 2017 range, meaning the Riksbank assumes it to remain near historically low levels. Seim’s message contrasts with the likes of the Bank of Canada, the Federal Reserve and the central bank of New Zealand. All of them raised their estimates. The deputy governor holds the view “that there is little to indicate that we are in a completely new world where the neutral interest rate has risen sharply, or will do so in the near future.” The implications for monetary policy are that policy rates around zero or even negative again cannot be ruled out in cases when inflation is far below target. Seim’s analysis paints a bleaker longer-term outlook for the Swedish krona as it offers the central quite some leeway to lower rates further from the current 2.75%. Money markets discount <100 bps of rate cuts over the next four meetings.

Hungary’s GKI business confidence index fell by more than 2 points in November to a 17-month low of -11.3. The outlook deteriorated in all four sectors surveyed, led by industry and construction. Trade remained the most pessimistic, services sector the least. The predictability of the business environment deteriorated to a 2-yr low. Price increase plans in the business sector increased noticeably compared to the previous month, rising to an 11-month high. The simultaneously published consumer confidence index decreased to a 12-month low on sharply increased dissatisfaction from households with their financial situation over the past 12 months. Views for the year ahead deteriorated somewhat, potentially on a significant uptick in inflation expectations. Perceptions of Hungary’s economy 12 months ahead were about the same. The economic sentiment indicator, which combines business and consumer confidence, dropped to the weakest level since October last year. A deteriorating (business) eco outlook and price rising expectations paints a stagflationary picture which may have originated from the recent sharp HUF depreciation. EUR/HUF today jumped to 411, matching the recent November 2-yr highs.