Markets
US CPI eased more than expected in November to 7.1% headline and 6% core inflation. The downside surprise was no more than 2 and 1 hundreds of a percent respectively but it mattered for markets. US short term yields dropped almost 25 bps intraday (2y), outperforming the long end (<20 bps in the 10y). Part of those losses were recouped later in the session. Yields eventually closed 15.8 bps lower at the short end with the 2y yield losing the 4.25% neckline support. The back of the curve shed 3.9 bps. The 30y underperformed after a 3 bps tailed $18bn auction. US Treasury action pulled German Bunds in its slipstream. But the damage in terms of yields was limited to a max of 5.1 bps at the front. Gilt yields parted ways by searing more than 10 bps (10y, 30y) in the wake of a strong labour market report. The dollar got dumped yesterday. The trade-weighted index fell to the lowest level since June (103.98). USD/JPY retreated from 137.67 to 134.66 with further losses prevented by the 200dMA. EUR/USD snapped higher, beyond the 38.2% recovery of the ‘21/’22 decline (1.0611). Sterling traded somewhat disappointing given the deviating Gilt performance. GBP/USD eked out a big figure to 1.2366 but EUR/GBP finished the day slightly higher just south of 0.86. Technical factors could have been at play. Another failed test of the 0.8567 support area triggered reverse action higher. Interesting moves on equity markets yesterday as well. The likes of the Nasdaq only retained about a percent of its almost 4% surge at the open.
There’s some news flow in Asian dealings in the form of new economic forecasts in New Zealand (see below) and Japan’s Q4 Tankan survey. UK CPI came in at 10.7% headline and 6.3% core early in the European morning. Both are a little less than expected but for the moment fail to trigger a reaction in sterling. If there even was one, it eases the case for another 75 bps rate hike by the BoE tomorrow. All eyes are now turned to the US for today’s main event, the Fed policy decision. The US central bank is poised to slow the tightening pace from (4x) 75 bps to 50 bps. That will bring the policy rate to 4.25/4.50%. The real market information lies in the new economic projections. These will probably entail another upward revision to the inflation forecasts. PCE inflation was seen in September at 5.4% this year, 2.8% next year and 2.3% in 2024 before returning the 2% target in 2025. Although economic indicators in most cases held up relatively well lately, we wouldn’t be surprised to see some downward adjustments to the growth forecasts. This is because we expect the Fed to have raised the terminal policy rate to 5% and perhaps even more, in line with recent guidance from chair Powell and others. Critically, both the median rate projections (dot plot) and Powell will emphasize that this higher policy rate is here to stay for longer. In a sense, markets have brought this upon themselves. Because of the recent sharp repositioning financial conditions have eased materially, undoing part of the Fed’s efforts. We anticipate a strong pushback against the 50 bps rate cuts being priced in for the second half of next year – which in our view is unjustified and have never been consistent with Fed talk.
News Headlines
The New Zealand government presented its Half-Year Economic and Fiscal update this morning. FM Robertson warns for a rough year ahead with the economy forecasted to shrink by 0.8% in the 2023 calendar year. Household incomes will feel the pain from rising mortgage interest rates, higher unemployment and falling house prices. Mortgages are linked to the RBNZ’s aggressive anti-inflation campaign with the policy rate currently at 4.25% and expected to peak at 5.5%. The unemployment rate is set to rise from 3.3% to 3.8% by mid-2023 and to 5.5% by mid-2024. The focus in the government’s 2023 budget will be to contain spending and achieve a contractionary fiscal policy. The 2022-23 budget deficit is forecast at NZD 3.6bn (vs NZD 6.6bn in May) and projected to return into surplus in 2024-25. Net debt is set to rise from 17.2% of GDP mid-2022 to 21.4% by mid-2024.
OPEC yesterday published its monthly oil market report. The cartel warns that the recent global economic growth slowdown will have far-reaching implications for next year which it labels as surrounded by many uncertainties mandating vigilance and caution. More specifically, OPEC sees a finely-balanced market in Q1 2023 instead of a deficit in the November Monitor. The cartel for now decided to keep its global oil demand and supply forecasts for next year broadly unchanged though. Oil prices dropped almost 20% over the past month with Brent crude setting a cycle low at $75/b, before rebounding to the $80/b area where it is trading now.
