Sunset Market Commentary

Markets

Markets received another dose of realism in the form of solid US economic data. US December housing data came in on the strong side of expectations. Building permits, seen as a leading indicator for the sector, rose by 1.9% m/m (1495k) vs 0.7% expected. Shovel-in-the-ground housing starts, the next step in the process, declined far less than expected (-4.3%) after a bumper November month, even with the downward revision (10.8%). Simultaneously published weekly jobless claims dropped below the 200k mark. The 187k marked the smallest increase since September 2022, which in turn printed some of the lowest figures since 1969. The disclaimer that the series is notoriously volatile doesn’t alter the fact that it has been steadily trending lower since June of last year. The strong shape of the US (service) economy’s backbone makes investors think twice about their aggressive Fed positioning. A poor Philly Fed business outlook did take some of the shine away, only recovering to -10.6 vs -6.5 expected. US yields in the run-up to the data eased a few bps after yesterday’s surge before reversing course afterwards. Changes vary between -1.4 (2-y) to +2.8 bps (30-y). This compared to moves of -5 bps to -2 bps for the same maturities before data release. The 10-y yield extends gains beyond the 4.07% resistance area (23.6% recovery on the EoY decline).

The ECB minutes of the December 13-14 policy meeting are worth mentioning, even if they come just a week before the next gathering takes place. President Lagarde at the time noted several times how the fresh forecasts due to an earlier cut-off date assumed a rate path that was higher than markets were pricing in. The minutes showed frustration among policymakers about markets frontrunning too much and they agreed on the need to push back. Before declaring victory over inflation and deciding on a rate cut, the ECB first needs evidence of wage growth easing. With negotiations ongoing this could take some time, ie. the summer as said by Lagarde yesterday. German rates barely reacted. They trade a choppy sideways pattern, leading to changes of -1.1 bps at the front and +3.3 bps at the long end of the curve.

EUR/USD (1.0868) in FX space aborted an early morning attempt to recoup the 1.09 big figure. Technical return action is pushing the pair now towards the lowest levels since mid-December around 1.085 even as equities get a solid bid. The Japanese yen licks its wounds after some serious three-day beating against the USD and euro. Sterling ekes out some additional gains (EUR/GBP 0.857), building on yesterday’s momentum after a CPI beat lifted gilt yields by more than 20 bps. The latter do ease several basis points today though.

News & Views

The International Energy Agency published its monthly oil market report today. They expect that global oil demand growth will continue to slow. The trend was already visible in Q4 2023 (1.7 mb/d YoY) coming from levels of around 3.2 mb/d in Q2-Q3 2023 2023. Growth is projected to ease from 2.3 mb/d in 2023 to 1.2 mb/d in 2024, as macroeconomic headwinds, tighter efficiency standards and an expanding EV fleet compound the baseline effect. World oil supply is forecast to rise by 1.5 mb/d to a new high of 103.5 mb/d, fueled by record-setting output from the US, Brazil, Guyana and Canada. This would result in a surplus for most of 2024. The IEA view contrasts with the one presented by OPEC yesterday. The Organization of Petroleum Exporting Countries expects robust oil demand growth next year (1.8 mb/d) driven by China and the ongoing economic recovery, eventually leaving the oil market in deficit through to the end of 2025 unless Saudi Arabia and its allies, which are currently cutting production, boost output significantly. Brent crude prices continue to hover just below $80/b where they have been trading for most of the fresh year.

The Bank of England published its Q4 2023 quarterly credit conditions survey today. Lenders reported that the availability of secured credit to households increased in the three months to end-November and is expected to be unchanged over the next three months. Demand for such lending for house purchases and remortgaging decreased in Q4 but both are expected to rise again in Q1. Overall spreads on this secured lending widened in Q4, but are set to narrow back. Default rates and loss given default were higher and set to rise further. The overall availability of credit to the corporate sector slightly increased in Q4, but demand from SME’s and large firms decreased as well. Default rates were expected to increase slightly for SME’s.