Dollar Still Looks Vulnerable Short-Term

Markets

European bonds after a hesitant start captured a solid bid yesterday. Markets again raised the odds for an ‘early spring’ ECB rate cut (April 70% chance). ECB’s Lagarde before the European parliament holding a ‘balanced leaning against the wind’-bias clearly didn’t change the intraday momentum, on the contrary. The ECB chair reiterated that it’s not the time to declare victory on inflation and that the medium term outlook on inflation remains considerably uncertain. However, admitting that inflationary pressures will continue to ease only reinforced the markets’ view that the debate from now on will be on the timing of a rate cut. Lagarde also indicated that the ECB will reassess PEPP reinvestment policy in a not too distant future, however with little impact on LT yields for now. German yields declined about 7.0 bps for the 2-y and 30-y.The belly of the curve outperformed (5-y -10 bps). The German 10-y yield again nears recent correction lows just north of 2.50%. US bonds initially lagged the broader rally, as investors awaited the outcome of the 2-y and 5-y Treasury auctions. The 5-y sale was ok. The 2-y sale was less buoyant as bonds already rallied into the sale. Even so, it only caused a temporary blip in the intraday rally. In the end, US yields declined between 8 bps (10-y) and -6.0 bps (2 & 30-y). Lower yields this time didn’t help equities. (Eurostoxx50 – 0.40%, S&P 500 -0.2%). The dollar is struggling to maintain ST support levels. DXY (103.2) closed near last week’s low. USD/JPY dropped from the 149.50 area to close at 148.7. EUR/USD (close 1.0954) nears the 1.0965 resistance.

Asian equities are trading mixed with Japan and Hong Kong underperforming and Korea outperforming. US yields decline marginally as does the dollar, especially against the yen. Today, plenty of central bankers are again scheduled to speak. Regarding the data, the focus is on the US house price data and consumer confidence (Conference Board). With yields again nearing key support (US 10-y 4.34%, German 10-y 2.50% area) the bond rally might slow, but we don’t see a trigger for a U-turn as markets are counting down to the EMU inflation data (tomorrow and Thursday) and the US PCE deflators (Thursday). The dollar still looks vulnerable short-term. A break of 1.0960/65 opens the way to the 1.10 big figure even as we remain cautious on sustained EUR/USD gains further out. UK BRC shop prices (November) this morning eased further (cf infra). For now it didn’t hurt the ST sterling momentum. EUR/GBP 0.8650 (ST neckline) serves as intermediate support.

News & Views

Adobe Analytics forecasts online sales to the tune of $12.4bn on “Cyber Monday”, beating last year’s $11.3bn thanks to new demand and not simply higher prices. Online spending was bigger than a year ago and larger than estimated on Thanksgiving ($5.6bn; +5.5% Y/Y) and Black Friday ($9.8bn; +7.5% Y/Y) as well. Adobe indicated as well that more shoppers are using the “buy now, pay later” formula ($782mn on Monday; +18.8% Y/Y and $7.3bn so far in November; +14% Y/Y). Analysts at Adobe said that the uncertain demand environment pushed retailers to deliver big discounts this season, while also fortifying their e-commerce services with flexible payment methods. Consumers have taken note and spent at record rates despite dealing with rising costs in other parts of their lives.

The British Retail Consortium published its monthly shop price index. Shop price inflation stabilized on a monthly basis, with the annual reading slowing for a sixth consecutive month, from 5.2% Y/Y to 4.3% Y/Y. Details showed a discrepancy between falling non-food (-0.1% M/M & 2.5% Y/Y from 3.4% Y/Y) and rising monthly food prices (+0.3% M/M & 7.8% Y/Y from 8.8% Y/Y). BRC commented that retailers compete fiercely to bring prices down for customers ahead of Christmas. Lower domestic energy prices are also reducing overall input costs. In 2024, retailers face new headwinds from government-imposed increases in business rates to the hidden costs of complying with new regulation. Adding the biggest rise to the National Living Wage on record suggests that especially disinflation in food prices is at risk of stalling or even reversing.