Markets
Yesterday, trading basically followed the pattern from earlier this week. Bonds rallied, with Europe outperforming as investors took further comfort from below consensus (headline) inflation data in most EMU member states. France joined this trend with CPI printing lower than expected at -0.1% M/M and 6.7% Y/Y (from 7.1%). US data brought a more diffuse message. The headline manufacturing ISM suggests a modest contraction in activity easing from 49.0 to 48.4. However, from a policy point of view, details were ambiguous. The prices paid subindex declined from 43.0 to 39.5, suggesting a further easing of inflationary pressures. At the same time, employment rebounded into expansionary territory, highlighting risks to wage growth, annex underlying inflation. JOLT job openings staying at 10458k also suggested a resilient US labour market. The Minutes of the December 13-14 policy meeting confirmed the Fed’s strong commitment to eradicate inflation. In this respect, the MPC clearly wasn’t happy with an easing of financial conditions and again strongly rejected markets discounting rate hikes for the second half of this year. In the end, it hardly changed the market dynamics. US yields declined between 1.7 bps (2-y) and 5.6 bps (10-y), again driven by a further decline in inflation expectations. Bunds still outperformed with yields ceding between 9.1 bps ( 2y) and 12.3 bps (5-y). Investors hope that the worst inflation might be over supported equities with Europe (EuroStoxx50 + 2.36%) again outperforming the US (S&P +0.75%). The dollar (DXY close 104.25) returned part of Tuesday’s gain. EUR/USD rebounded from 1.0541 to close at 1.0604. USD/JPY was the exception to the rule, as the BOJ-driven rally of the Japanese currency ran into resistance. USD/JPY rebounded off the 130 support area to close at 132.63. UK PM Sunak setting out the governments objectives, including halving inflation, reducing debt and restoring growth, didn’t really inspiring sterling. EUR/GBP held a tight range near to 0.88 big figure (close 0.8796).
This morning, sentiment in Asia remains mostly risk-on with China outperforming as investors ponder the potential positive impact of the reopening. The yuan extends its recent upleg (USD/CNY 6.874). The yen trades little changed after yesterday’s correction (USD/JPY 132.5). US yields are inching slightly higher.
Later today, the calendar is modestly interesting with the US ADP labour data, jobless claims and trade balance. Fed speakers (Harker, Bullard) probably will confirm the Fed anti-inflationary commitment. In case of constructive activity data, recent bond rally might gradually slow, with tomorrow’s payrolls potentially holding the key for the next directional move. On FX markets, the dollar shows tentative signs of bottoming, but without a clear technical signal yet. EUR/USD is locked in a ST range between 1.0520 and 1.0713/35.
News Headlines
The National bank of Poland left its policy rate unchanged at 6.75% yesterday. Inflation decreased in November to 17.5% y/y due to lower energy and fuel prices. However, given companies’ ability to pass through higher (operating) costs due to relatively strong demand, core inflation is still trending higher (11.4%). The NBP expects the weakening of global economic conditions to weigh on Polish growth. In those circumstances, it considers the currently delivered tightening sufficient to support a decline in inflation towards the NBP inflation target beyond the short term. This process would go quicker if the zloty trade more consistent with the economic fundamentals. In this respect, the central bank remains prepared to intervene in the FX market. The zloty yesterday appreciated from EUR/PLN 4.676 to 4.667 but that move was inspired by a constructive mood on broader markets supporting  CE FX in general.
Egypt’s pound crashed to a record low against the US dollar yesterday. USD/EGP officially closed at 26.275, a 6.3% surge in what is seen as the third devaluation in less than a year. The two previous ones date back to March and October 2022, after the Egypt government pledged to adopt a flexible exchange-rate policy that allowed it to secure a $3bn loan from the IMF. At the start of 2022, USD/EGP traded around 15.7. Following the conflict between Russia and Ukraine, Egypt is struggling with sharp FX outflows as investors shunned it for being so reliant on the countries at war for its wheat imports. This causes huge dollar shortages and external imbalances that could ease thanks to a weaker pound. Soaring inflation amidst rising raw material prices added to the sense of urgency at the government. It also prompted the central bank in December to jack up interest rates by a whopping 300 bps to 16.25%.
