Markets
EUR/USD 1.19, 1.20, 1.21 and today 1.22… Things have been going quickly for EUR/USD since the end of November. December EMU PMI’s provided the latest push in the single currency’s back, with euro strength taking over from genuine dollar weakness. Consensus feared a mere stabilization after fresh European lockdowns sank November PMI’s, but was awarded by a near complete reversal of the last month’s slip. IHS Markit Chief Business Economist Williamson said that the Q4 downturn looks far less steep than feared and far less steep than the hit from the pandemic seen earlier this year. The EMU composite PMI rebounded from 45.3 to 49.8 (vs 45.7 expected), approaching the 50 equilibrium mark. The export-oriented manufacturing sector (55.5 from 53.8) continued to make up for weakness in the domestic services industry (47.3 from 41.7). General future output expectations jumped to a 32-month high, as prospects brightened amid recent news on vaccine developments. Details showed the slowest rate of job losses since the start of the pandemic with new orders rising slightly (acceleration manufacturing vs slower decline in services). On a country-level, Germany’s manufacturing steamed ahead with France making a services-induced comeback. Interestingly, input cost inflation rose to a 19-month high, particularly as raw material prices and dollar weakness increase manufacturing production costs. Selling prices in that sector also rose to a 22-month high whereas charges in the services sector still decline despite modestly rising input prices.
Not only FX markets reacted to the EMU PMI’s. Growth and inflationary prospects propelled (long term) yields, steepening the curve. German yields add 3.2 bps (2-yr) to 5 bps (30-yr). The German 10-yr yield leaves the danger zone below -0.60% behind with the European 10y swap rate moving away from -0.30% support. The US yield curve moved in similar fashion with yields adding 0.8 bps to 4.3 bps (30-yr). Tonight’s FOMC meeting plays on the US side of the story with markets anticipating fresh guidance on asset purchases (tied to policy goals), but no more than that (see KBC Sunrise). European stock markets gained up to 1% initially, testing the recovery high (eg EuroStoxx 50), but are off the intraday best levels. Brent crude tested the $51/b mark. Sterling benefited slightly against a strong euro after British MP’s were put on standby for an extended House of Commons sitting next week. EUR/GBP ticked 0.90.
News Headlines
Canadian November headline inflation accelerated from 0.7% to 1% y/y (0.1% m/m), beating 0.8% expectations. Core measures stabilized at October levels, ranging from 1.5%-1.9% y/y. Adding to the headline increase was the shelter category while gasoline dragged the index down. The Canadian loonie loses vs. an overall weak dollar (USD/CAD 1275) though the (early) profit-taking move was inspired by overnight comments from BoC governor Macklem, saying the recent loonie appreciation is on the central bank’s “radar”.
The US Treasury Department labeled Vietnam and Switzerland as currency manipulators in its semiannual foreign exchange report. Both met all three of the criteria, one of which related to FX interventions by the central bank, to be labeled as such. The Swiss National Bank responded to the news by saying it is willing to intervene even more strongly, capping the Swiss franc’s rise in the wake of the US report.
US retail sales disappointed in November. Headline series fell 1.1% m/m (-0.3% m/m expected) as states reimpose lockdowns. Core measures also showed declining sales volumes whereas a marginal increase (0.1% m/m) was anticipated. The control group, a private consumption gauge excluding auto, gas and building materials, fell 0.5% m/m. Food and beverages were one of the few categories printing increasing last month (Thanksgiving?).The below-consensus came with a downward revision of the October reading of all gauges to -0.1% m/m.
