Markets
Markets yesterday understandably started the week in a wait-and-see modus, looking forward to key eco data, including US CPI and policy meetings of the Fed, the ECB and the Bank of England later this week. One-year inflation expectations in the New York Fed’s consumer expectations survey eased slightly from 3.57% to 3.36%, the lowest level since April 2021, but were unchanged for the horizon 3-y (3.0% ) and 5-y ahead. The immediate impact on US bond trading was limited. US yields trended higher ahead of a $50 bln 3-y Treasury Note auction and a $37 bln 10-y note sale. Both auctions only attracted mediocre investor interest. Still yields finally trended south again after the auctions were out of the way. US yields changed between -1.3 bps (2-y) and +2.3 bps (30-y). German yields also altered less than 2 bps across the curve. Expectations for easier financial conditions continue to support equities. The Dow and the S&P 500 touched now top levels for 2023. The Nasdaq set a 2023 closing high. On FX market headlines/speculation on whether or the BOJ will change its ultra-easy policy anytime soon still were an important driver for trading. Bloomberg comments said that BOJ officials considered it too early to already leave the era of sub-zero rates. USD/JPY throughout the day rebounded to the mid 146 area to close at 146.18. Gains in the DXY index (close 104.1) were limited and technically insignificant. EUR/USD even closed little changed at 1.0765. Sterling tested the EUR/GBP 0.8550 area, but a sustained break again didn’t occur.
Today, the US November CPI release will take center stage. Headline inflation is expected unchanged on the month with the Y/Y measure to ease from 3.2% to 3.1%. The consensus expects core inflation at 0.3% M/M and 4.0% Y/Y (from 0.2% and 4.0% previous month). We assume that a big surprise in either direction will be needed to trigger a big/sustained market reaction going to tomorrow’s Fed policy decision. In the meantime, we look out whether the bottom in yields set last week might become more solid. The recent inflation data probably will allow Fed governors in the dots to remove a final rate hike. Question now is how much room for rate cuts they see in 2024. A maximum of 50 bps expected rate cuts might help to trigger some consolidation on the recent decline in yields. Such a scenario might also put a floor for the dollar. In Europe, we look out whether ZEW German investor confidence might bring some good/less negative news.This morning, UK November labour market data printed on the soft side of expectations. Payrolled employees declined 13k compared to the previous month and there was a slowdown in the October average weekly earnings (7.2% from 8.0% vs 7.7% expected overall; 7.3% from 7.8% vs 7.4% expected ex bonus). EUR/GBP currently gains about 10-15 ticks to trade near 0.857.
News & Views
The Polish parliament yesterday appointed Donald Tusk as the new prime minister in a 248-201 vote. It did so after outgoing PM Morawiecki lost a vote of confidence a few hours earlier, effectively bringing eight years of PiS rule to an end. Tusk’s centre-right and pro-European Civic Plaftorm, a coalition of opposition parties, won the elections in October. But the PiS being still the biggest single party was given a first shot by president Duda to try to secure another term in office even as key potential partners to form a majority ruled out working together in advance. Duda is a PiS appointee and is said to have helped stalling Tusk’s nomination. He’s also seen as the biggest threat to Tusk’s legislative agenda due to its veto powers. The president on Monday left for a two-day visit to Switzerland, meaning Tusk only can be signed into office upon his return tomorrow. The incoming prime minister will nevertheless present his government and its programme in parliament later today and attend a EU summit later this week.
Indian authorities recently banned onion exports, restricted the use of sugar for ethanol production and cut the size of wheat stocks traders and retailers are allowed to hold. This comes on top of other export restrictions on rice, wheat and sugar that were already in place and have helped sent global prices materially higher amid weather-related supply disruptions in other major producers as well. Despite a recent correction, sugar prices are at multiyear highs. Rice in recent weeks is being sold for prices well above historical averages. India’s decision is seen in light of next year’s general elections with the Modi government trying to dampen domestic prices in the run-up.
