Markets
Interest rate markets tried to build on last week’s ‘U-turn’ after the accelerated decline in yields triggered by the December Fed policy announcement. Corporates and sovereigns are eager to use lower funding costs to frontload at least part of their 2024 financing needs, with new bond issuance taking a solid start. Still, a sustained countermove on the recent bond rally not only needs supply but also an economic narrative. US yields maintain some upside momentum going in the release of the manufacturing ISM and the JOLTS job openings (see below), rising between 4 bps (2-y) and 5.5 bps (30-y). Richmond Fed president Barkin sees a soft landing scenario as ‘increasingly conceivable, but in no way inevitable’. Most Fed officials are expecting rate cuts in 2024, but he stressed the Fed is keeping a close eye both on the economic performance and inflation continuing its decent. With respect to the latter, the recent plunge in yields could stimulate too much demand and keep inflation elevated. He even kept the option for further rate hikes on the table. Understandably, his remarkets were ‘invisible’ on the interest rate charts. German yields in the meantime reversed an early rise to trade marginally lower across the curve. French and German CPI data to be published tomorrow ahead of the flash EMU estimate on Friday are expected to face a less easy comparison base compared to previous months, potentially lifting the Y/Y (headline) measure. However, given recent market momentum, European investors stay cautious to front-run on such an outcome. A more gradual rise/pause in the core yield rebound compared to yesterday doesn’t help risk sentiment. The EuroStoxx 50 is ceding 1.5%, turning its back to the multi-year top reached last week. US equities opened about 0.5% lower (S&P). The dollar extends its comeback. DXY is testing the 102.5 area, compared to a correction low near 100.62 last week. EUR/USD is drifting further south in the 1.09 big figure. First resistance at 1.0875 (38% retracement of the rebound since early October) is coming on the radar. With the BOJ still in wait-and-see modus, USD/JPY revisits the 143 area. Sterling holds ‘strong’ (EUR/GBP 0.865).
At the time of finishing this report US JOLTS job openings eased further from 8852k to 8790k. The headline manufacturing ISM rose slightly more than expected to 47.4 from 46.7, but the prices paid subindex dropped from 49.9 to 45.2 while new orders unexpectedly eased to 47.1. Yields declined a couple of bps after the release.
News & Views
The Swiss manufacturing industry can’t buck the global trend and remains in dire straits. The PMI ticked from 42.1 to 43 in December, but is stuck deep into contraction territory since early 2023. Details showed a new deceleration in output (43.6 from 46.6) with companies running down inventories (45.5 from 49) and hardly having any backlog of orders (39.8 from 38.1). The quantity and stock of purchases slowed at a slower pace though, suggesting that 2024 might see a new start in the inventory cycle. Companies still shed jobs, though at a much smaller pace (49.2 from 46). The data didn’t impact Swiss markets, but a quick look at the FX chart shows that the strong Swiss currency is also one of the factors holding back the manufacturing industry. The November/December global bond rally played in the advantage of the Swiss franc with EUR/CHF touching an all-time low just above 0.9250 around year-end when we exclude volatility around the end of the release of the EUR/CHF 1.20 peg early 2015.
Turkish inflation accelerated to 2.93% M/M in December with the Y/Y-comparison broadly unchanged at 64.77%. Clothing and footwear and transportation were the only two categories reporting a M/M-decline. Underlying core inflation readings also increased by 2.3% to 3% M/M with Y/Y-figures depending on the specific measure around 61% to 70%. Today’s data were close to expectations and in line with the central bank’s outlook. The Turkish government’s end of December decision to hike the minimum wage by 49% this year poses additional upside risks to the Turkish inflation outlook, leaving the Turkish central bank with no options but to stick with its hawkish stance. In an orthodox turn after May’s elections, the CBRT raised its policy rate from 8.5% to 42.5%, but the pace of hiking is slowing (+250 bps in December). A (final) January hike (to 45%?) is still in the cards. The Turkish lira continues its gradual depreciation process facing deep negative real yields. EUR/TRY is close to the all-time high just below 33.
