Sunset Market Commentary

Markets:

The chase is sometimes better than the catch. Lemmy knew. Scooter knew. And now we know. Since the start of the week, investors have been chasing down bond yields. In Europe, anticipation on lower inflation numbers offer part of the explanation. ECB Lagarde switching focus from policy rates to halting PEPP reinvestments ahead of the current shelf date (end 2024 at the earliest) strengthened the markets’ early rate cut bias as well. Today’s Spanish and German EU harmonized November CPI numbers showed steep monthly drops of respectively -0.6% and -0.7%. A retreat in energy prices and tourism (Spain) & holiday packages (Germany) are the main culprit. The Y/Y-figures slowed from 3.5% to 3.2% in Spain and from 3% to 2.3% in Germany. National data for France and Italy and the EMU aggregate number are due tomorrow. After “catching” the data releases, investors held back from pushing EMU bond yields even lower. Negative daily European changes are solely due to a lower opening, catching up with WS action yesterday. German yields trade 4.1 bps (30-yr) to 6.6 bps (2-yr) below Tuesday’s close. Apart from the anticipation effect, we can’t stress enough that statistical base effects will from next month onwards push headline inflation back higher to more sticky levels around 3%-4%. The OECD in its latest economic outlook also said that it expects the ECB and the BoE to hold policy rates at their current peak until 2025 because of persistent inflationary pressures. That’s in stark contrast of current market pricing (start cutting cycle in Q2 2024).

US Treasuries initially extended their rally on yesterday’s “strategic” comments by influential Fed governor Waller. In one of the final interviews ahead the silence period, he showed readiness to start cutting policy rates if the US disinflationary process runs for “another 3, 4, 5, months…”. US Treasuries couldn’t ask for more in the current climate where investors react in an asymmetric matter. Magnifying every argument in favour of a fast central bank pivot and turning a blind eye to everything that argues in favour of higher for longer. Whether you like it our not, it’s the market current going into December Fed & ECB meetings which could serve as eye openers. Recall that the Fed as recently as September put forward a >5% policy rate for end 2024. Growth outperformed expectations while the US disinflation process ran according to prognosis. Financial conditions are back at square one after tightening significantly in October. US Q3 GDP was upwardly revised (5.2% Q/Qa from 4.9%) because of stronger business investment and government spending but didn’t alter intraday dynamics. US yield lose 5.5 bps (30-yr) to 10.2 bps (2-yr). In FX space, declining EMU inflation prevented a clear break through EUR/USD 1.10 for now (1.0980).

News & Views:

Q3 Swedish GDP growth was negative for the second consecutive quarter. Activity declined by -0.3% after a -0.8% contraction in the Q2 and is 1.4% below the level of the same quarter last year. The contraction was mainly the result of a decrease in inventories and reduced household consumption (-0.3% Q/Q). Household consumption was negative for the fifth consecutive quarter. The downturn partly offset by a positive contribution of net exports (1.5% ppt) as imports declined 1.5% while at the same time exports rose 1.5%. General government consumption was unchanged. Gross fixed capital formation dropped by 0.6 percent. Last week, the Swedish Riksbank (RB) left its policy rate unchanged at 4% even as inflation (CPIF 4.1% % and CPIF excluding energy 6.1%) remains well above the 2%. Target. The RB expects negative growth for both this year (-0.7%) and next (-0.2%). Despite a soft RB policy approach, the Swedish krone strengthened beyond EUR/SEK 11.40 support due to lower core yields globally.

Belgian inflation increased by 0.17% M/M, raising the Y/Y figure from 0.36% to 0.72%. Core inflation still stands at 5.95% Y/Y in November even as it declined from 6.55% Y/Y in October. Energy prices are the major driver behind the low headline inflation, declining 32.9% Y/Y in November. Food price inflation remains high at 8.22% Y/Y. In a monthly perspective, the most significant price increases in November concerned alcoholic beverages (9.8%), natural gas (10.8%), non-alcoholic beverages (3.2%), travels abroad and city trips (2.8), vegetables (2.3%), electricity (1.7%) and fruit (2.2%). Motor fuels (-4.5%), hotel rooms (-7.3%), the purchase of vehicles (-0.7%) , domestic heating oil (-2.8) and dairy products (-1.5%) had a downward effect. The first inflation estimate according to the European harmonized index of consumer prices (HICP flash estimate) for Belgium was -0.7% Y/Y in November 2023.