Markets
Today counts as the real first trading year of the year with UK and US investors returning from New Year festivities. Only Japanese markets remained closed. German December inflation figures were the main dish. Regional numbers throughout the day served as an indicator for the national number, released in European afternoon. It explains the early market move. German inflation declined more than expected on a monthly basis (-1.2% M/M) with the Y/Y-reading down from 11.3% to 9.6%. The monthly fall is almost completely due to government support to help pay households’ gas bills. Food prices on the other hand continued to increase at the end of 2022. Last week’s Spanish inflation numbers showed a similar phenomenon: headline inflation rising by 0.1% M/M, but the Y/Y headline outcome down to 5.6% (from 6.7%). Spanish core inflation on the other hand set a new record high from 6.3%Y/Y to 6.9%. This divergence between headline and core inflation will be a theme in the first months of the year. Despite today’s market reaction, investors shouldn’t be mistaken: core inflation is the needle in the ECB’s compass and the reason why Lagarde and co delivered their hawkish 50 bps rate hike back in December. Strong German labour market data today also add to the central bank’s normalization/tightening case. Whatever the theory, markets today embraced the bigger-than-hoped for drop in headline inflation. German yield cede 4.8 bps (2-yr) to 11.7 bps (30-yr). The German 10-yr yield tested the previous cycle high at 2.53% around the turn of the year. Changes on the US yield curve are even slightly bigger (in a catch-up move) with yields 7.1 bps (2-yr) to 14.2 bps (10-yr) lower. The single currency faced a moment of weakness in the European session with EUR/USD losing more than one big figure intraday. The pair fell from 1.067 to 1.052, the lowest level since mid-December, before rebounding to 1.0570. EUR/GBP declines from 0.8850 to 0.88. Stock markets have a second strong session straight with main indices gaining over 1% in Europe and opening 0.5% to 1% stronger in the US.
With national Spanish and German inflation numbers pointing to a below-consensus EMU figure on Friday, market focus will now shift to the US with FOMC Minutes, ADP employment, payrolls and ISM’s for both manufacturing and non-manufacturing all printing between Wednesday and Friday. We see scope for a market reaction especially in case of stronger numbers given market thinking on the February Fed meeting. The market is split between a second consecutive 50 bps rate high (25%) or a new downshift to 25 bps (75%).
News Headlines
Turkish inflation slowed substantially in December. The monthly rise in prices slackened to 1.18%. Given a big 13.58 M/M rise in the last month of 2021, this difference caused a huge base effect, easing December 2022 Y/Y inflation to 64.27% from a 84.39% rise in November and a cycle top of 85.51% in October. The decline in headline inflation was also slightly bigger than expected. Core inflation eased sharply to 51.93% from 68.9%. PPI inflation declined 0.24% M/M to reduce the Y/Y reading to 97.72%. The positive base effect likely stays in play for the January inflation. At the same time, the decline might slow as the government prepared substantial fiscal support going into the presidential elections that are to take place in June this year. The Turkish lira showed a mixed picture today, losing modest ground against the dollar (USD/TRY 13.73) but gaining against a broadly weaker euro (EUR/TRY 19.80).
Bulgarian President Rumen Radev gave Nikolay Denkov of the formal ruling party (We Continue the Change) a chance to form a new government. The nomination of Denkov came as the biggest group in Parliament, the center right GERB party, failed to form a government after winning the Parliamentary elections on October 02 last year. However, analysts see only a slim chance for Denkov to be able to form a government. If the a third attempt also fails to from a new government, the president will have to dissolve Parliament with the ongoing political stalemate resulting in new snap elections in spring.
