Markets
Have we seen the peak in headline (EMU) inflation? No, if we follow yesterday’s guidance by ECB Lagarde. Yes, if we look at today’s market reaction following some national inflation readings. Spanish inflation fell by 0.5% M/M with the annual pace decelerating from 7.3% Y/Y to 6.8% Y/Y. Lower fuel and utility prices were the main culprit. Spanish headline inflation peaked back in July, but is more exception than rule in Europe. Core inflation (6.3% Y/Y) remained strong – and rising –though due to above-average monthly price gains in services and core goods. ECB vice-president de Guindos recently said that core inflation is the signal to follow for the ECB. The same divergence between headline and core inflation is visible in Belgium: the headline number fell by 0.23% M/M with the Y/Y-pace down to 10.63% from 12.27%. Core inflation accelerated from 6.5% Y/Y in October to 7.16% in November. Finally, German inflation stabilized on a monthly basis with the Y/Y-reading as expected down to 11.3% from 11.6%. Beyond package holidays and energy, the underlying picture remains one of persistently high price pressures. The topping off of headline inflation convinced final doubters on the outcome of the mid-December ECB policy meeting: it will be a slowdown to a 50 bps rate hike, bringing the ECB deposit rate at 2% instead of sticking with the current 75 bps pace. New inflation forecasts will nevertheless still be upwardly revised for at least 2023. It implies that the central bank will start 2023 still with a tightening bias, as policy rate hikes will be complemented with the start of the balance sheet reduction (running down APP portfolio). European money markets currently discount a second 50 bps rate hike in February, followed by two 25 bps moves in March and May after which the ECB reaches its peak policy rate. We continue to err on the hawkish side of these forecasts as inflationary pressures won’t abide in 2023.
German yields today lose 3.8 bps (30-yr) to 7.3 bps (2-yr). The euro swap curve turns less inverse with yields up to 6.2 bps lower at the front end and flat at the very long end. German Bunds clearly outperform US Treasuries with YS yields 2 to 3 bps higher across the curve today. The single currency for most of the European session held strong despite the loss of interest rate support. EUR/USD mostly changed hands near 1.0350. As US trading got going, new dollar strength entered the equation, pulling the pair to the low 1.03 area. Yesterday’s hawkish Fed comments might still be at play with several Fed governors pushing back against current market expectations which all of a sudden seem rather dovish given this month’s correction lower in yields. Fed Chair Powell speaks tomorrow.
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Overall Belgian CPI declined 0.23% M/M, slowing the headline figure from 12,27% Y/Y in October to 10.63% Y/Y this month. In a Y/Y perspective, energy prices remain a major contributor (36.07% Y/Y rise, 3.62 ppt contribution). Food inflation still accelerates, rising 14.48% Y/Y and adding 2.76 ppt to overall inflation. Due to a further rise in inflation of processed food and services, core inflation rose accelerated from 6.50% to 7.16%. Services inflation also rose from 5.22% to 5.49% Y/Y. The most significant price increases on a monthly basis were registered for alcoholic beverages, clothing, travels abroad, vegetables, restaurants and cafés, dairy products and bread and cereals. However, electricity, natural gas, holiday villages, non-durable household goods and maintenance charges in multi-occupied buildings had a decreasing effect on the index.
Canadian Q3 GDP rose a stronger than expected 2.9% Q/Q (annualized) down from 3.2% in Q2, but beating expectations for a more modest growth of about 1.5%. Details were mixed. Final consumption expenditure rose 0.8% Q/Qa, but this was due to non-profit consumption and government consumption (5.3%). Household consumption declined 1.0%. Gross fixed capital formation also turned negative (-5.0% ) for the second consecutive quarter with residential structures investment falling 15.4% Q/Qa. Inventories added slightly to growth (0.23 ppt). Net exports added 3.38 ppts, with exports rising 8.6% and imports contracting 1.5%. The household savings rate rose from 5.1% to 5.7%. Households disposable income increased by 3.3% Q/Qa, from 3.8% in Q2. The monthly GDP indicator for October suggests a further cooling, easing to 0.1% M/M from 0.3%. The loonie lost further ground with USD/CAD extending its recent rebound to 1.355. The 2-y yield (3.93%) rises marginally (+1.5 bps) in line with the US.
