Markets
‘Quite before the (potential) storm’ on markets today as investors are counting down to a large plethora of data and policy decisions later this week. European and Asian investors started the week with a tentative risk-off mood as a cold snap in most of Europe and rising Covid infections in China highlight short-term roadblocks to economic activity in both regions. European equities are ceding about 0.5%. US indices open marginally positive after Friday’s setback. Contrary to end last week when higher yields weighed on (especially) US equities, a fragile risk sentiment again caused a bull flattening/further inversion of EMU and US yields curves. German yields are ceding between 2 bps (2-y) and 7 bps (30-y). US yields in a similar fashion are declining between 2 bps (2-y) and 6.5 bps (30-y). Still, with the German and US 10-y yield holding at 1.85% and 3.53% respectively, key technical levels at 1.77% and 3.50/3.42% for now aren’t challenged any further. Intra-EMU spreads continue a cautious narrowing (10-y Italy minus 3 bps) even as the ECB on Thursday is expected to announce a framework to start a (gradual) roll-off of its APP bond holdings. Later today, the US Treasury will sell $40 bln of 3-year and $32 bln of 10-y Notes. It’s interesting to see investors appetite for the bond after recent substantial repricing/curve inversion, especially for bond with longer-dated maturities.
On FX markets, the dollar again fails to maintain Friday’s rebound even as declines in US and European yields are quite similar. The DXY TW USD (104.75) index again dropped below the 105 barrier with the correction low (104.11) still within reach. At 1.056, the EUR/USD cross rate also keeps the key 1.0611 target on the radar. The yen underperforms with USD/JPY trying to regain the 137 big figure. Higher-than-expected Japanese PPI inflation (9.3%) published this morning obviously isn’t enough to change markets’ assessment on the BOJ’s approach in the near future. After a surprising outperformance of sterling on Friday, EUR/GBP today returned to well-known territory in the 0.86 area. UK October production/monthly GDP data were slightly better than expected, but should be considered a bit outdated and probably won’t change the BoE’s assessment. Among the smaller currencies the Swiss franc continues to trade rather weak (EUR/CHF 0.986) as markets ponder whether the SNB will raise its policy rate by 75 or 50 bps at its policy meeting on Thursday, with the second option seen as most likely.
News Headlines
Czech inflation accelerated more than expected in November, by 1.2% M/M lifting the Y/Y outcome from 15.1% in October to 16.2%. Inflation would have been 3.6 percentage points higher if it weren’t for the inclusion of government measures. “Housing, water, electricity, gas and other fuels” and “food and non-alcoholic beverages” recorded the biggest monthly increases. Last year’s lower comparative base, when VAT was waived for electricity and natural gas prices, partially contributed to the increase. Prices of goods in total went up by 1.8% M/M (18.5% Y/Y) and prices of services by 0.3% (12.7% Y/Y). The overall November inflation figure was more than two percentage points lower than expected in the Czech National Bank’s autumn forecast. The negative deviation was due mainly to administered prices, which reflected a fall in electricity prices in October due to the statistical inclusion of the energy savings tariff. Core inflation declined, but remains high at 13.8% Y/Y. The CNB expects Y/Y price growth to remain volatile in the near future. It will only be around mid-2023 that inflation is expected to fall to single digit levels with a return closer to the 2% inflation target in H1 2024. EUR/CZK didn’t respond to the release, trading extremely steady at 24.30. The Czech swap yield curve turns slightly more inverse with yields up to 5 bps higher at the front end following an initial spike of almost 15 bps.
Slovak debt agency Ardal announced its 2023 borrowing requirements. They aim to raise €8bn in long term funding, split evenly between regular auctions (9) and new syndications (2). It compares with €5.2bn YTD this year. The country’s maturity profile suggests a new long 10-12y bond and one with a medium-term maturity. Typically, Ardal aims for early Spring and Autumn syndications. T-bill issuance doesn’t make part of next year’s plans. Slovakia has around €55bn of government bonds outstanding with the debt to GDP ratio expected to revert <60% by the end of this year and stabilize thereafter.
