Markets
Risky assets enjoy an extended stay in paradise. 2023 could hardly start better for equity markets with the likes of the EuroStoxx50 jumping another 2% plus. The star index is closing in on the recovery closing high just south of 4k. Advances in US bourses were less outspoken. The Nasdaq outperforms by adding about 0.6%. The optimistic mood was attributed to early morning reports coming from China that it is considering further support for its ailing property sector. Another below-consensus inflation outcome in France also shaped the positive risk mood in the sense that the worst might be behind us. Prices in December unexpectedly fell by 0.1% m/m, bringing the yearly figure to 6.7% y/y, down from 7.1%. Consensus estimates were for 0.4% m/m and 7.3% y/y. Final French PMIs served as icing on the cake with the services and composite reading – though still sub 50 – being more than 1 point better than their preliminary estimates (49.5 and 49.1 respectively). This lifted the European-wide gauges as well (49.8 services and 49.3 composite). Core bonds rallied further with Germany outperforming the US. Ongoing price drops in commodities (oil -3.3% and at risk of losing the $80/b level, TTF gas -8% to €66.8/MWh) add to those dynamics via easing inflation expectations. Net daily changes for Germany vary between -7.6 bps to -11 bps with the belly of the curve outperforming the wings. European periphery spreads vs. Germany’s 10y yield ease a few bps, Italy on top (-7 bps). US yields also in a belly outperforming move shed 3.9 to 5.7 bps as investors across the Atlantic await the publication of the US manufacturing ISM and the Fed December minutes. During that meeting, the dot plot showed a terminal rate of 5-5.25% but with a large minority favouring even higher rates. In a speech today, Minneapolis and voting Fed president Kashkari revealed himself being part of that minority, projecting a 5.25-5.5% policy rate before pausing. His comments came even after inflation showed signs of topping out. It suggests that the Fed is cautious in calling victory until it is sure that prices have indeed peaked and are clearly on track to the 2% goal.
The dollar rally yesterday already hit a wall today. The greenback loses out against all G10 peers but the Norwegian krone. On a trade-weighted basis, the DXY index eases from 104.579 to 104.05. EUR/USD recoups about half of yesterday’s losses. The pair is trying to settle back above the 1.06(11) resistance area. Japan’s yen BoJ boost looks exhausted, at least for the short term. USD/JPY met support at 130 and EUR/JPY at the 137 area – a trading zone that served as support/resistance at multiple occasions in 2022. UK PM Sunak set out his priorities for the coming year in his first remarks of 2023. Among the pledges made are cutting inflation in half, growing the economy and ensuring that national debt is falling by the end of the current Parliamentary tenure (January 2025). Sterling was unimpressed and held an erratic trading pattern around EUR/GBP 0.88.
News Headlines
The Bank of England published its monthly Money and Credit statistical release. Approvals for house purchases by individuals, an indicator of future borrowing, decreased to 46.1k in November, from 57.9k in October, the lowest level since June 2020 (40.5k). Approvals for remortgaging (with a different lender) fell to 32.5k in November from 51.3k in October, and were below the previous 6-month average of 48.1k. The effective interest rate on newly drawn mortgages increased by 26 bps to 3.35%. The rate on the outstanding stock of mortgages increased by 9 bps, to 2.38%. The annual growth rate of borrowing by large businesses decreased by 0.4 ppt to 6.4% Y/Y, while for SMEs it rose by 0.1 ppt, to -3.8% Y/Y. The average cost of new borrowing from banks by UK non-financial businesses increased by 52 bps to an effective interest rate of 4.33%. The effective interest rate on new loans to SMEs increased by 78 bps to 5.52%, and was the highest on record (series starting in January 2016).
Swiss CPI inflation fell by 0.2% M/M in December with the Y/Y figure declining from 3% to 2.8%. Prices for fuels and heating oil, fruiting vegetables and medicines were amongst the ones falling in the final month of last year while rents for holiday flats and the hire of private means of transport increased. The average annual inflation also reached +2.8% in 2022. Prices for domestic products increased by 1.6% on average, those for imported products increased by 6.7%. Average annual inflation was +0.6% in 2021 and -0.7% in 2020.
