Markets
Rassemblement National’s Le Pen in interview with Bloomberg caused a sigh of relief across markets. After supporting the motion of no confidence that brought down the Barnier government, she’s opened up to any new Prime Minister as long as he/she presents a budget that pencils in a “reasonable trajectory” to bring down outsized deficits. French spreads narrowed sharply and we expect them to settle around the current levels for the time being. There was a general wave of cautious optimism rolling over broader European markets . German Bund yields rose between 2.4 and 6.9 bps in a bear flattener move, stocks rose around 0.7% (EuroStoxx50) and the euro gained against its G10 competitors. EUR/USD rallied from 1.0511 towards the 1.06 area with a weaker dollar helping too. US Treasury yields initially joined the European move higher but some weaker second-tier eco data capped the potential. Net daily changes eventually varied between -1.1 bps (30-yr) and +1.7 bps (2-yr). Markets today brace for the November payrolls report. Job growth should rebound from the -28k decline in October. The negative impact from strikes and hurricanes back then should have been unwounded in November. These kind of statistical bounce-backs are difficult to interpret though. If anything we expect a slightly bigger reaction in case of a downside surprise. A December cut is highly likely but still not fully discounted. Additionally, the bar for pricing out even more cuts in 2025 (about a cumulative 50 bps) is high. We consider front end yields as being most vulnerable for losses. The dollar may lose some ground. If EUR/USD pushes beyond 1.06, the next reference pops up between 1.0666-1.07. We’re keen to see whether the euro is now up for some gains against the dollar of its own making as well. The jury’s still out, but signs are growing that Euro area markets are nearing peak pessimism. The Financial Times yesterday ran an article about several EU countries discussing a new €500bn finance vehicle that could issue bonds backed by participating members to fund common defence projects. It’s a potential important precedent that may pave the way for other initiatives (e.g. green transitioning). It would also open up much-needed fiscal space on a national level.
News & Views
Japanese October wage and consumer spending data published this morning showed a mixed picture. Regular base salary which is seen a less volatile measure for the wage growth dynamics rose 2.8% Y/Y, unchanged from the previous month. Nominal cash labour earnings for all workers rose slightly from a (downwardly revised) 2.5% Y/Y to 2.6%. Real cash earnings were printed at 0.0% Y/Y but improved from -0.4% the previous month. Most of the these wage indicators were close to expectations, some slightly softer than expected. However, while a bit mixed they probably still can be seen by the BoJ as confirming that data wage developments will help keep inflation on a trajectory to sustainably reach the 2% inflation target. Another data series showed real consumer spending declining 1.3% Y/Y in October. This compares to a -1.1% decline in September and market expectations for an even faster drop -2.5% Y/Y. This might show some erratic swings on a monthly basis. The data are important input for the BoJ as it meets on December 19. The market and analysts remain divided whether the BoJ will take a next step to policy normalization already at this meeting or wait until Q1 of next year. The yen hardly reacted to the data. USD/JPY is still hovering near the 150 mark (149.9).
At the press conference the day after Wednesday’s policy meeting, governor Glapinski of the National Bank of Poland (NBP) struck a hawkish tone. The NBP as widely expected kept its policy rate unchanged at 5.75%. Until recently, comments from (some) MPC members suggested that the Bank could start discussing a rate cut at the March meeting. Some members still hold that line (comments from Wnorowski published this morning on Bloomberg). However, Governor Glapinski yesterday indicated that the path in inflation might be more complex due to the handling of the cap on energy prices by the government. Glapinski sees inflation rising to about 5.0% in Q1 2025, but it might again pick up in the 4th quarter. In this context the debate on easing rates might be delayed till October rather than March. The zloty strengthen to the EUR/PLN 4.26 area.
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