Markets
At last! At last a below-consensus US inflation number. At last a below-consensus US inflation number at the right time, coming on the heels of last week’s Fed meeting. Recall how markets initially interpreted the FOMC policy statement as suggesting that last week’s 75 bps rate hike was the final such aggressive one. Recall how FOMC Chair Powell afterwards tried to harden the message, saying the slowdown could just as well only come in February rather than December. It’s a done deal now for markets that the Fed will slow it down to 50 bps in December. Especially with little in the way between now and the early December eco update (ISM’s, ADP & payrolls). Zooming into today’s CPI, the downside surprise wasn’t that big to be honest. Headline inflation stabilized at 0.4% M/M (vs 0.6% M/M expected) with the Y/Y figure decelerating from 8.2% to 7.7% (vs 7.9% expected). Underlying core inflation (the more important one!!) slowed from 0.6% M/M to 0.3% M/M (vs 0.5% expected) with the Y/Y figure down to 6.3% from 6.6% (vs 6.5% expected). The strong market reaction therefore is telling. For the first time, markets actually seem into buy into the story that the Fed could enter the “end phase” of its tightening cycle. We warn not to overinterpret one month’s worth of data though. Details showed only negative M/M-readings coming from gas service (-4.57% M/M) and used cars & trucks (-2.42% M/M). Motor fuel (4.01% M/M), gasoline (3.99% M/M) but also sticky items such as shelter (+0.75% M/M) and food (meat, poultry, fish & eggs; 0.61% M/M) still increased. In any case, US yields sink especially at the front end of the curve. They drop 11.5 bps (30-yr) to 21 bps (2-yr). European stock markets bounced over 2% intraday with main US gauges opening up to 5% stronger for Nasdaq. The dollar lost two big figures immediately after the release with EUR/USD rising from 0.9950 towards an intraday high near 1.0150. We add that the greenback traded stronger going into the release, coming from an open above parity. Some mentioned the ECB’s economic bulletin as main reason, with the ECB stressing upside inflation risks and downside economic risks. From a technical point of view, EUR/USD 1.0198 is final intermediate resistance ahead of the key 1.0350 area. Today’s figure confirms that this year’s downward trend in EUR/USD, which started back in February, is over. Going forward, we look for a more sideways trading pattern between the cycle low of 0.9536 and 1.0350 on the topside. The trade-weighted greenback DXY is on the verge of falling out of a similar upside trend channel, testing the income downside at 109.19 which almost coincides with the July top at 109.29. USD/JPY loses 145 support which is the neckline of a double top formation with final target at around 138. Cable (GBP/USD) is testing the October high at 1.1645. EUR/GBP falls from an open at 0.8815 to currently 0.8726.
News Headlines
Czech inflation stumbled 1.4% m/m in October, bringing the figure on a yearly basis down from 18% to 15.1% vs 17.9% expected. The much-lower-than expected price pressures are overwhelmingly the result of state household support for energy costs. Administered prices tanked 16.9% m/m, reflecting a fall in electricity prices due to the statistical inclusion of the contribution for the energy savings tariff. They also lowered the housing, water, energy & fuel component by 9.4% m/m. The Czech National Bank calculated that without the measures inflation would be 3.5 ppts higher. Core inflation declined only slightly to 14.6%. Today’s numbers are more than 2 ppts lower than the CNB’s autumn forecast because the central bank did not explicitly account for this effect. Czech swap yields collapsed between 37 and 52 bps across the curve as any remaining tightening bets were completely priced out. The Czech koruna dipped from EUR/CZK 24.31 to 24.4 before paring losses to 24.33 currently.
The ECB increased the amount of securities that national central banks in the euro area can lend out against cash collateral. The limit on such transactions will be lifted from €150bn to €250bn the ECB said. Executive Board member Schnabel explained it’s a precautionary measure to ease collateral scarcity, which has been exacerbated by years of ECB bond buying, and support market functioning around the year-end.
