Markets
We didn’t find a specific driver, but UK Gilts are significantly outperforming German Bunds and US Treasuries today. Yesterday’s prediction by the Centre for Economics and Business Research did gain more attention in media. It suggested that falling natural gas prices may shave £13bn off the UK Treasury’s spending. UK yields cede 5.1 bps (2-yr) to 15.5 bps (30-yr). Changes on the German curve range between -2.5 bps (2-yr) and -7.9 bps (30-yr) while US yields drop up to 5.2 bps (30-yr). 10-yr yield spreads vs Germany drop 4 to 5 bps with Italy (-7 bps) and Greece (-10 bps) outperforming. We face difficulties in understanding the market rationale these days. Overall risk sentiment remains positive, contributed to less pessimistic economic outlooks and the Chinese economic reopening. Main European stock markets add another 1% today with global commodity prices rising 1% and more (energy) as well. It’s hard to interpret the core bond moves in this context, which seem to be zooming in on declining (headline) inflation. If anything, we think that more economic resilience will longer support economic demand and thus keep inflation relatively higher, allowing central banks to keep monetary policy more restrictive than in case of bad economic weather. An easing of global financial conditions (lower rates, higher stocks, weaker dollar, smaller credit spreads) also suggests that central banks might have to err on the hawkish side of expectations. For those reasons (and others), we advise against buying into the core bond rally while acknowledging their momentum.
Sterling loses out against other majors because of the loss of yield support. EUR/GBP is currently testing the 0.8867/77 resistance. The probability of a break increases, paving the way to the 0.90+ area. GBP/USD falls back from 1.2175 towards 1.21. The euro and the dollar kept each other more or less in balance though the equilibrium is extremely delicate. FI and FX markets are positioning for another US CPI inflation decline tomorrow. At EUR/USD 1.0765, the pair remains within the resistance area between 1.0735/47/61/87. ECB and Fed speeches and the empty eco calendar helped sustaining this subtle balance. The US Treasury continues its mid-month refinancing operation tonight with a $40bn 10-yr Note auction. Yesterday’s $40bn 3-yr sale met with stellar demand. On Thursday, the Treasury concludes with a $18bn 30-yr Bond.
News Headlines
Czech inflation was slightly softer than expected in December. Prices stabilized on a M/M basis, resulting in a decline in the Y/Y rate to 15.8%, down from 16.2%. According to the Czech statistical office average inflation over 2022 was 15.1%. However, on a monthly basis, there was quite a big divergence within different price categories of the consumer basket. Prices for transport declined 3.1% M/M with fuels and lubricants for domestic transport declining 10.5% M/M. Prices of alcoholic beverages and tobacco also declined 1.3% M/M. On the other hand, prices of housing, water, electricity and gas rose 0.4% M/M. Prices in recreation and culture also gained 0.9% M/M. In aggregate prices of good eased 0.2% M/M. Services went up by 0.3% M/M. The Czech national bank in its December policy statement indicated inflation to soften in the October/December period due to the methodology for including the electricity savings tariff. Still the CNB expected inflation to reach a cycle peak toward the 20% area in January. The Czech 2-y swap yield eased 8 bps today. The krone slightly underperformed the region with EUR/CZK rebounding north of 24 (24.02).
Hungary posted a budget deficit of HUF 1287bn in December, bringing the full-year deficit to HUF 4753bn. The finance ministry also reconfirmed the target for this year’s budget deficit at 3.9% of GDP. PM Orban already last month indicated that the deficit would be 3.9% rather than the 3.5% indicated earlier. As moderation in fiscal spending is important to ease inflationary pressure. A higher deficit doesn’t help to improve the risk context the MNB considers to be needed to remove exceptional policy measures. The forint weakens slightly today, returning the EUIR/HUF 400 barrier.
