Markets:
Today’s waiting game ahead of the November US manufacturing ISM and Powell’s final public appearance ahead of the blackout period before the December 13 FOMC meeting freed up time to take a look at some of the key asset classes’ November performance. It’s stating the obvious that bonds after three years of mainly gloom turned out big winners. US Treasuries clearly outperformed German Bunds which in their turn performed better than UK Gilts. US Treasury yields lost 40 bps (2-yr) to 60 bps (10-yr & 30-yr) on a monthly basis. Investors embraced softer payrolls growth, the ongoing disinflationary process and Fed comments as evidence of the goldilocks safe landing scenario. At the end of October, they still pondered the possibility of a final rate hike early next year (50% probability at the January meeting) with an end of 2024 policy rate expected around 4.5%-4.75%. One month later, we’re talking about a fully discounted first rate cut at the May meeting with a prognosed EoY policy rate of 4%-4.25%. German Bunds followed US Treasuries with monthly changes varying between -20 bps (2-yr) and -40 bps (30-yr). A first 25 bps ECB rate cut is now discounted by the April 2024 meeting from the June meeting one month ago. Investors see the ECB policy rate now clearly below 3% by the end of next year compared to a level of 3.25% at the end of October. UK gilt yields lost 17.5 bps (2-yr) to 34 bps (10-yr) with Bank of England members being the most vocal in pushing back against market pricing of a rapid central bank pivot. Overall, we don’t believe that the big central bankers will have the scope for policy rate cuts before H2 2024 with the Fed in pole position to be a frontrunner in the cycle. Monthly yield differentials and the positive risk climate in help explaining sterling’s outperformance against the euro and the dollar. EUR/GBP ended the month at 0.8625 from 0.8707. Cable (GBP/USD) rallied from 1.2153 to 1.2624. EUR/USD went from 1.0575 to 1.0888 with a small stay above 1.10 (first time since mid-August) in between. The trade-weighted dollar (DXY) faced losses of 3%. The S&P 500 rallied by almost 9% with the Nasdaq adding 10.70%. Both tested the 2023 top. The EuroStoxx50 added nearly 8% over the reference period.
News & Views:
Q3 growth in the Czech Republic surprised again on the downside. After marginal growth of 0.1% Q/Q in Q1 and Q2, activity contracted by a bigger than expected 0.5% Q/Q in the July-September quarter. Activity was 0.7% below the level in the same period last year. Household consumption declined by 0.3% Q/Q, but financial consumption expenditure overall (+0.7 Q/Q) was supported by strong demand from the public sector (1.2%). Gross capital formation declined by 1.8% Q/Q. Both fixed investment (-0.3%) and especially changes in inventories contributed negatively as was the case for external demand. Also today, the Czech manufacturing PMI at 42.0 (from 41.7) indicates an ongoing contraction in the sector in Q4. This keeps the Czech economy on the brink of a potential recession in the second half of this year. Poor activity data and sluggish (foreign & domestic demand) might support the case for the Czech National Bank to start (CNB) its easing cycle already at the December 21 meeting. Even so, a rate cut, if any, will probably be limited (25 bps) as the CNB wants to be sure that price setting at the start of the new year won’t support an upward price spiral.
The November Canada labour market report was mixed to slightly stronger than expected. The economy added 24.9k jobs (net), slightly more than the 14k expected. Growth was due to a substantial rise in full time jobs (+ 59.6k). Part time employment declined. Employment increased in manufacturing (+28k) and construction (+16k), but declined in the services sector (-13.4k). Still the unemployment rate rose slightly from 5.7% to 5.8% on a further increase of the labour force. Total hours worked declined 0.7% M/M but were still 1.3% higher on a Y/Y-basis. The hourly wage growth rate for permanent employees was unchanged at 5%. Even as the BoC still has a tightening bias due to persistent core inflation, today’s report will allow it to keep a wait-and-see approach at next week’s policy meeting. The loonie gains marginally after the release of the report (USD/CAD 1.3525), extending its recent gradual rebound against the dollar.
