Markets
UK labour data published this morning served as a starter before for the release the US CPI this afternoon. The data came out on the soft side of expectations. November payrolled employees declined 13k from a gain of 39k in October (and 5k expected). The series is on a downtrend, but proved quite volatile over previous months. Probably more important for markets, average weekly earnings declined more than expected both including bonusses (7.2% from 8.0%) and the ex-bonus (7.3% from 7.8%). The report overall suggests that demand pressure might gradually ease but it will take time for this to translate into a sustained cooling of inflation to 2.0%. Even so, it again was enough for markets to bring forward the pricing of BoE rate cuts. A first 25 bps BoE rate cut is now discounted for June, rather than August. UK bonds outperform Bunds and Treasuries, with yields declining 7.0/9.0 bps across the curve. The interest rate reaction also called off recent attempt of sterling to strengthen beyond the EUR/GBP 0.855 support, now nearing the 0.86 big figure. Interesting to hear the BoE assessment on Thursday.
US November inflation data printed almost exact in line with expectations, with the headline at 0.1% M/M and 3.1% Y/Y and the core rising 0.3% M/M keeping the Y/Y measure unchanged at 4.0%. In a first reaction, the market briefly tried recent reaction function. No upside surprise in a first instance was seen as ‘soft’. However, markets soon understood that the report didn’t bring any new information to tomorrow’s Fed decision. US yields currently more than reverse most of the brief post-data drop with yields rising between 1.0-2.5 bps across the curve. Recent lows (in yields) will apparently stay intact going into tomorrow’s Fed decision. German Bunds still outperform with the 2-y unchanged but still declining up to 4.5 bps at the very long end (30-y). A stronger than expected ZEW economic confidence (expectations 12.8 from 9.8) as usual didn’t impress markets. Recent lows, especially for longer maturities are still quite nearby. Equities both in the US and Europe, ‘struggle’ to maintain recent gains (e.g. S&P 500 open -0.2%; EuroStoxx 50 -0.1%) still trying to sustainably break/hold above the YTD peak levels. The dollar broadly copied the reaction of yield markets, a tentative spike lower in the USD immediately after the CPI was (more than) reversed. At 103.9, DYX still trades a few ticks lower in a daily perspective. EUR/USD also is trading marginally higher (1.0785). USD/JPY trades near 145.6 (open of 146.18). Yesterday’s spike on Bloomberg comments that the BOJ likely isn’t going to phase out negative rates anytime soon was reversed intraday, but the pair rebounded post CPI.
News & Views
The European Commission released its semi-annual funding plan for the period covering January-June 2024 today. It intends to issue €75 bn of long-term EU bonds, complemented by short-term bills with the total, yearly amount within the boundaries of the yet-to-be-announced annual borrowing limit for 2024. Benchmark maturities range from 3 to 30 years, with issues through tap transactions and new lines, using auctions (seven planned) and syndications (six). The maturities for the new lines will depend on market conditions and the intention to bring liquidity to the curve where more is needed (with a tentative focus on 3y, 10y, 15y and possibly 30y for conventional lines). The EC may consider one new long dated green bond, alongside tap transactions in the first half of this year. The funds raised will be used to meet payments primarily related to NextGenerationEU and, in case of the green bond, to finance the green component of the recovery plan.
Chinese state media reported the country will step up policy adjustments to support an economic recovery next year. The media said that China plans to implement structural tax and fee cuts as well as a new round of fiscal and tax reforms with the structure of spending to be improved. It added that the country will maintain sufficient liquidity and make sure money supply matches the expected goals of economic growth. According to Reuters sources, next year’s growth goal may be set at around 5%, the same as in 2023. While that target may be achieved this year due to last year’s low-base effect (Covid lockdowns), sticking to the 5% for 2024 may prove much more difficult and could require more fiscal stimulus. The official growth target was discussed at the December 11-12 meeting by the country’s top leaders but will only be publicly announced at the opening of the annual parliament meeting, usually in March.
