Markets
Friday’s post-ISM moves petered out yesterday though US Treasuries continued to outperform German Bunds. The NY Fed’s Survey of Consumer Expectations showed median one-year-ahead inflation expectations continuing to decline in December, falling by 0.2 ppt to 5%, its lowest reading since July 2021. In contrast, three-year-ahead inflation expectations were unchanged in December at 3%. US Fed governors again stressed the need to lift the policy rate beyond 5% as core (services) inflation shows no signs of slowing down yet. (FI) Markets selectively ignored the latter. US yields lost another 2.8 bps (10-yr) to 4.2 bps (2-yr). The US 10-yr yield is closing in on the support zone 3.4% (Dec low)/3.42% (50% retracement on Aug/Oct move higher)/3.49% (previous June high). German yields added 1.9 bps (10-yr) to 3.7 bps (20-yr) with the wings of the curve underperforming the belly. The dollar faced a second consecutive day of heavy selling pressure. The trade-weighted greenback (DXY) set a new sell-off low just below 103. EUR/USD tested the cycle top at 1.0735. 62% retracement on last year’s decline comes in at 1.0747 with the May high at 1.0787. Those levels are at risks of giving away this week, especially in case of a softer than expected US December CPI on Thursday. EUR/GBP over the past sessions failed to take out 0.8867 resistance. The pair closed just above 0.88 yesterday. We retain rather mixed comments by chief economist Pill. On the one hand he talked about the uncertainty around inflation drivers and a firm commitment to bring inflation back to the 2% target. On the other hand he pointed to the possibility of a turning labour market. “Should economic slack emerge and unemployment rise as the latest MPC forecasts imply, that will weigh against domestic inflationary pressure and ease the threat of inflation persistence.” Today’s eco calendar remains extremely thin. We keep a close eye on central bank speeches and the start of the US mid-month refinancing operation following the latest move in US Treasuries.
The Kingdom of Belgium (rated Aa3/AA/AA-; outlook all stable) yesterday announced that it intends to issue a new 10-yr syndicated OLO benchmark (OLO 97 Jun 2033) in the near future, subject to market conditions (likely today). It’s the first of three new expected benchmark deals in 2023 which serve to help complete a €45bn OLO funding need. In 2022, the Belgian debt agency raised €44.1bn in long term funding. OLO issuance is the lion share to cover this year’s €51.07bn gross borrowing requirement of the federal government, mainly consisting of a €27.54bn net financing requirement and €21.13bn worth of OLO redemptions. Apart from Belgium, also Italy (Sep2043) and Latvia (5y deal) mandated banks for a near term syndicated deal. Other sovereigns that didn’t hesitate to get new €-funding on the primary market last week included Slovenia (€1.25bn, MS +77 bps, 3.625%, Mar2033 & €0.25bn tap of 3.125% Aug2045 at MS +137 bps), Austria (€5bn, MS +8 bps, 2.9%, Feb2033), Portugal (€3bn, MS + 75bps, 3.5%, Jun2038) and Ireland (€3.5bn, MS +43 bps, 3%, Oct2043). All deals met with stellar demand.
News Headlines
Regional CPI data for Japan’s capital, a potential precursor for the nationwide development, show a seventh consecutive rise in December. The closely watched Tokyo core measure (excluding Fresh food prices) jumped from 3.6% to 4%, the highest level in about 40-year. The headline measure also touched 4%. The core-core reading, excluding fresh food and energy rose from 2.4% Y/Y to 2.7%. The rising inflation is putting pressure on the BOJ to take further steps to policy normalization after it widened the corridor for the target level of the 10-y yield in December. The BOJ is expected to upwardly revise inflation forecasts when it meets next week. The BOJ today didn’t announce any additional bond buying other than the regular purchases. The yen gains marginally USD/JPY (131.75).
The UK and the EU issued a joint statement after a meeting of UK Foreign Secretary James Cleverly, European Commission Vice President Maros Sefcovic and Norther Ireland Secretary Chris Heaton-Harris. The statement said that ‘while a range of critical issues need to be resolved to find a way forward, an agreement was reached on the way forward regarding the specific question of the EU’s access to UK IT systems’. This agreement on data exchange is seen as an important step to organize a workable solution for trade with Northern Ireland that both protects the Belfast Good Friday agreement and at the same time gives guarantees for both the integrity of the EU single market and the UK internal market. A new meeting to take stock on the progress in the process will take place on Jan 16.
