Markets
Core bonds had an uninspiring day today. US Treasuries whipsawed and currently shed about 1-3 bps across the curve with most of the losses taking place as US investors started joining. Economic data included nothing more than the Chicago and Philly Fed’s second tier national and non-manufacturing activity index. The former fell sub zero, indicating below trend growth while the latter recovered from -20.3 to a still negative -11. German bund yields slip about 4 bps with the 2-y yield struggling for survival above the 3% barrier. UK gilts underperform at the front. The long end loses up to 4 bps. Bank of England governor Bailey in his appearance before parliament said markets are “putting too much weight on the current data”, referring to the sharp but largely base-effect related drop in inflation last week. At the heart of the debate is services inflation, which has proven to be much more sticky than the headline suggests. While Bailey said it is sensible to keep rates where they are, Ramsden for his part doesn’t want to rule out raising rates further. Mann said straight out that she would like to see rates higher than now. She noted that the BoE’s pause in the tightening cycle has led to easing financial conditions. This is unwinding some of the central bank’s earlier tightening, perhaps too soon. This is exactly what is happening in core markets as well but which markets for the moment completely ignore. Currency markets are more of the same, with the weakening dollar taking center stage. EUR/USD is extensively testing the 1.096 resistance zone. DXY confirms yesterday’s tentative break sub 50% retracement on the July-Oct rally. USD/JPY extends a recent drop but for now manages to stay north of 147.43 support. Sterling fights back after a failed test of EUR/GBP to hit a new recovery high. The pair is now changing hands in the 0.873 area with spill-overs from GBP/USD (extending gains beyond 1.25) supporting the move. Stocks in Europe trade slightly under water and open in the red in the US as well.
News & Views
In its final budget proposal for 2024, the Greek government expects the country’s economic growth to accelerate from 2.4% this year to 2.9% next year. Aside from positive domestic demand, growth is expected to be supported by a further rise in investment (15.1% compared to a projected increase of 7.1% this year), as the country continues to take up funds from the EU structural and recovery funds. Annual inflation is forecasted to decline to 2.6% by the end of 2024 from 3.9% this year. The budget includes pay rises for civil servants and pensioners and a € 600 mln reserve for natural disasters. Still the government expects fiscal consolidation to continue. The primary budget surplus should rise from 1.1% this year to 2.1% next year. Solid nominal growth and ongoing improvement in the budget is seen reducing the country’s debt to GDP ratio from 160.3 to 152.3%. The country in 2024 also expects €5.77 bln of receipts from privatizations. The country last month saw its credit rating raised back to investment grade by S&P (BBB-).
October inflation data in Canada reported today showed a mixed picture. Headline inflation printed at 0.1% M/M and 3.1% Y/Y (was -0.1% M/M and 3.8% Y/Y in September). The core trimmed (3.5% from 3.7%) and mean (3.6% from 3.9%) measures that are closely watched by the Bank of Canada also eased more or less as expected. However, other details showed a more nuanced picture. Inflation ex food and energy still rose 0.5% M/M and 3.4 Y/Y (from 3.2%) as the monthly decline in headline inflation was mainly driven by lower gasoline prices (-6.4% M/M). Good price disinflation continues (-0.8% M/M and +1.6% Y/Y), but services inflation remains elevated (0.9% M/M and 4.6% Y/Y, from 3.9% in September), with price gains for shelter and recreation & education (both 0.9% M/M) catching the eye. The Bank of Canada kept its policy rate unchanged at 5.0% at the previous two meetings, but indicated that it is still prepared to raise its policy rate if needed. In its October projections, the BoC expected inflation to average near 3.5% through the middle of next year before returning to 2.0% in 2025. Today’s data probably won’t change that assessment in a profound way. The BoC will hold its final policy meeting of 2023 on December 6. The 2-y yield rebounded temporarily after the CPI release but gains could not be sustained (currently -3 bps at 4.38%). The loonie gains modestly to revisit the USD/CAD 1.37 area.
. The core trimmed (3.5% from 3.7%) and mean (3.6% from 3.9%) measures that are closely watched by the Bank of Canada also eased more or less as expected. However, other details showed a more nuanced picture.){kind=link}