Markets
US president-elect Trump so far didn’t push back against rumours that any possible tariffs would be gradually installed. European stock markets lost some intraday momentum but still managed a 0.5% positive close. The bear steepening of European yield curve continued as well with EU swap rates adding 3.7 bps (2-yr) to 5.5 bps (30-yr) and German yields rising by 2.6 bps (2-yr) to 4.6 bps (30-yr). EUR/USD rebounded from 1.0239 to 1.0309. Apart from the euro-rebound story, USD lost some momentum as well after December producer prices rose less than feared (0.2% M/M vs 0.4% M/M for headline figure). Core PPI gauges painted a similar picture and provided some hope that the feared acceleration in US CPI (release this afternoon) won’t materialize. Daily changes on the US yield curve varied between -1.4 bps (2-yr) and +1.4 bps (10-yr). Stakes going into the CPI release are still high. We see asymmetric risks after the strong sell-off in US Treasuries with the market more eager to respond/rebound on a lower figure.
Sterling extended its underperformance with EUR/GBP testing the October top at 0.8448 as UK Chancellor Reeves was unable to calm investor nerves over the government’s fiscal trajectory. December inflation numbers this morning don’t make the GBP-equation any easier. Headline, core and services inflation all slowed more than hoped in Y/Y-terms, respectively to 2.5%, 3.2% and 4.4%. Recent sterling weakness came on the back of rising risk premia. Slowing inflation is welcome, but could deprive the UK currency faster from short-term interest rate support.
Bank of Japan governor Ueda said that the central bank will make a decision over whether to raise rates next week. He also flagged the (strong) US economy and the momentum toward spring wage negotiations. Together with yesterday’s similar remarks from deputy governor Himino – not ruling out a rate hike in January – and last week’s rumours about upward revision to inflation forecasts in the new quarterly projections (linked to surge in cost of rice and weaker yen), it’s a signal that can’t be ignored. The market implied probability of a 25 bps (to 0.50%) rate hike, our base case, increased from 60% to 75%. By the end of the year, one more additional rate hike (to 0.75%) is currently discounted. Japanese bond yields follow the global momentum. The Japanese 10-yr yield trades above 1.25% for the first time since April 2011. The 2-yr yield crossed 0.7% for the first time since October 2008 in the wake of the Ueda-comments. USD/JPY ticks lower to 157.50, but that move remains technically insignificant. The pair remains attracted by last year’s top at 161.95. Only a return below 148.65 would turn the picture more neutral.
News & Views
The European Commission (EC) approved another delay to Belgium’s submission of the budget plan covering the next couple of years. This second extension comes after missing the end-of-2024 target as negotiations to form a new government are still ongoing. Bart De Wever (N-VA) is leading the talks and expressed hopes to have an Arizona-coalition (including MR, CD&V, Les Engagés and Vooruit) in place no later than January 31. But the EC’s approval comes with some strings attached. The new deadline for the plan is set at end-April and should by then explain in detail which reforms and measures Belgium will be taking to reduce outsized deficits. If it doesn’t, the country will no longer have the option to spread the fiscal effort over 7 years. Instead, it will be locked in into the 4-year trajectory during which Belgium’s primary budget deficit has to decline by 0.72% of GDP over 2025-2028. Increases in expenses during that period are capped at 2.4% in 2025, 1.9% in 2026 and 2% in 2027.
The British Retail Consortium (BRC) after surveying 52 large UK retailers said about two-thirds of the CFOs warned they’ll pass on the increase of employer national insurance contributions to consumers. The increase of the payroll tax was part of the broader £40bn tax rises UK Chancellor Reeves presented during last year’s Autumn budget. Retailers have been warning ever since that it’ll further stoke inflation at a time when it is still well above the Bank of England’s 2%-target. As an example, the BRC said that food price inflation is expected to rise 3.5% this year, compared with the 2.9% in 2024.
