Markets
October CPI inflation was the first really important US data series for release after the Trump/Republican election victory. Concrete policy measures from the new US administration will decide which way activity and in inflation will ultimately go. Data in the meantime will help to define the starting point for Fed policy and the subsequent market reaction function. Ahead of the publication of the US CPI data, the Trump trade already slowed. US yields stabilized and so did the dollar. US equity investors pondered how much good news was already discounted as major indices touched record levels of late. The US CPI report printed exactly in line with expectations (headline 0.2% M/M and 2.6% Y/Y from 2.4% in September; core 0.3% M/M and 3.3% Y/Y, unchanged). Markets apparently were positioned for a potential upward surprise. Given a reflationary Trump agenda, this could have pushed the Fed to a more cautious approach, especially as US activity remains strong for now. Despite the inline outcome services prices remained elevated at 0.4% M/M and 4.7% Y/Y. So were housing related costs (0.4% M/M), fuels and utilities 0.8% M/M, amongst others , also rose. A disinflationary dynamics was seen in non-durables (-0.3% M/M), education and communication (-0.3%) and apparel and footwear (-2.0%). The US yield curve bull steepened after the data release with yields declining between 8.5 bps (2-y) and 4 bps (30-y). The reaction probably tells more about the market position than on the content of the inflation report. The report is seen as leaving the door open for a 25 bps Fed rate cut in December (now 75% discounted vs about 60% before the release). Bunds ‘for once’ underperform Treasuries today, with yields ‘rising’ about 1-2 bp in the 2-10-y sector (gains were up 6.0 bps before the US CPI release). Maybe the bottoming in German/EMU yields was at least partially due to comments for the Christian Democrat leader Herz. He indicated his party is open consider some reforms in the country’s strict borrowing rules, e.g. to finance investments. Recent USD rebound, while still setting minor now ST top levels against some other majors earlier today, already showed tentative signs of losing some momentum. It lost some, admittedly still modest ground, after the CPI release (DXY 105.85 from an intraday top of 106.2, EUR/USD 1.0630 from intraday low near 1.0595). The report & ‘setback’ in yields and the dollar didn’t help European equities (Eurostoxx -0.4%). US equities opened little changed. In a broader perspective, the report created a breather for the post-election phase of the Trump-trade, but is no game-changer.
News & Views
The Riksbank released the meeting minutes of the November policy meeting. It upped the pace of rate cuts from 25 bps to 50 bps (to 2.75%). Governor Thedeen in the minutes said that the central bank “should act on the information we have at hand here and now, which speaks in favor of a continued, but somewhat faster normalization of monetary policy.” There was a specific focus on the need for domestic demand to pick up to offset (increasing worries about) lackluster and volatile external demand. The meeting took place one day after the US elections in which it became obvious pretty soon that Trump would be the next president. The Riksbank noted the opposite risks that trade barriers pose for inflation. The latter is currently rising (1.5%) at a rate slower than the central bank’s 2% target. A further weakening in the Swedish currency due to ongoing rate cuts is seen as an upside risk to inflation. But unless SEK would depreciate materially and with the board downplaying the passthrough effects, the current weak krone probably won’t derail the central bank’s ongoing easing plans. EUR/SEK is hovering around 11.6 recently. Governor Thedeen labelled money market pricing of the Riksbank’s terminal rate just above 2% as reasonable.
China’s ministry of Finance today announced it is cutting home purchase deed taxes from 3% to 1% for first- and second-house flat buyers. It’s the latest measure of a series that also include lower borrowing costs on existing mortgages, relaxing buying curbs in big cities and easing downpayment requirements. Policymakers hope to shore up the country’s ailing property sector, which is also weighing on consumer demand and business sentiment. Finance minister Lan Fo’an a few weeks ago unveiled a $1.4tn debt swap to ease the burden on local governments and pledged to carry out “more forceful” fiscal policies next year.
