Sunset Market Commentary

Markets

The Japanese yen last week grabbed a lot of market attention over speeches by the Bank of Japan’s number 1 (governor Ueda) and shared number 2 (deputy governor Himino). Both fanned speculation over an imminent (ie December 19) policy shift, lifting Japanese yields and with it the yen. The currency hijacked the spotlights again today. A scoop by Bloomberg triggers sharp JPY underperformance with USD/JPY bouncing from <145 to 146.35 currently. EUR/JPY recoups much of last week’s losses to trade at 157.48. Compared to the intraday low  (JPY high) seen last Thursday (in the wake of the Himino-Ueda comments), the pairs trade respectively 4.7 and 4.2 yen higher. The financial news agency citing people familiar with the matter reported that the Bank of Japan sees little need to rush policy normalization, which could have included ending the negative rate (-0.1%) experiment later this month. The people said the potential cost of waiting for more information, amongst others evidence of higher wage growth, wasn’t very high and thus worth it. We take note of today’s report but add that it has the BoJ’s modus operandi written all over it. In December last year as well as this summer, the BoJ did exactly the same: downplaying any speculation so that markets expected nothing before coming up with something after all and enjoy the benefit of market moves being exacerbated through liquidity-thinned circumstances. Moves in markets outside Japan are contained and there’s nothing strange about that given the jampacked eco calendar this week. It kicks off with US CPI numbers tomorrow ahead of the Fed on Wednesday. The ECB and Bank of England (and the Norges Bank and Swiss National Bank) meet on Thursday. PMI business confidence indicators for Japan over Europe and the UK to the US are due on Friday. US yields today add a few basis points, building on Friday’s gains and extending a recent recovery. German bunds outperform with the long end easing about 3 bps. The dollar trades flat against the euro and sterling ekes out a gain vs both of them. EUR/GBP is testing support again at the 0.8557 level. This reference was tested multiple times last week and is the last hurdle before EUR/GBP returning to the YtD low of 0.8492.

News & Views

November Norway CPI today provided the final input for the Norges Bank’s (NB) final policy decision this year on Thursday. Inflation was very volatile over the previous months with a substantial downside surprise in September and a big upside surprise in October. November came in slightly lower than consensus. Headline inflation rose 0.5% M/M and 4.8% Y/Y (was 1.0% and 4.0% in October). Core inflation decreased 0.2% M/M bringing the Y/Y-measure to 5.8% (from 6.0%). The rise in headline inflation was mainly driven by a 3.4% M/M rise in prices for housing, water, electricity gas and other fuels. Clothing and footwear rose 2.8% M/M. Furnishings, household equipment, and routine maintenance (-1.7%), recreation and culture (-0.9% M/M) and communications (-0.4% M/M) slowed inflation. Both headline and core inflation were below the NB September forecast of respectively 5.4% and 6.1%. The NB back then kept an additional interest rate hike on the table (4.25% currently), depending on the data. The weak krone was a concern at time of the November meeting. Since then, the NOK rebound was limited given the overall easing of monetary conditions due to lower LT yields in the US and EMU. The krone today weakened from EUR/NOK 11.75 to currently 11.795.

Inflation in the Czech Republic in November rose 0.1% M/M easing the Y/Y-measure to 7.3% Y/Y down from 8.5%. Prices of electricity were .6% M/M higher and natural gas 0.7%. Clothing and footwear rose (1.0%). Prices for transport and health dropped 1.1% and 1.4% M/M. Goods prices remained unchanged M/M while services still increased 0.2% M/M. The Czech national bank in its autumn report forecasted November CPI slightly slower at 7.1%. According to the CNB this was due to a less pronounced slowdown in the Y/Y growth in administered prices. By contrast, core inflation slowed slightly more markedly than forecasted (3.9% vs 4.0% expected). Annual food price inflation also slowed significantly further (-0.4% M/M and 1.7% Y/Y down from 3.5%). The CNB concludes that the strength and broad nature of the disinflationary trend is illustrated by low month-on-month price growth in recent months. The CNB sees inflation averaging 2.7% in Q1 2024. The market still isn’t sure whether today’s numbers will be enough for the CNB to start its cutting cycle in December. CZK today trades marginally stronger at EUR/CZK 24.36.