Markets
Fed chair Powell laying the groundwork for a pause, possibly already in January, caused a late-session sprint in front-end US rates yesterday. In the first part of today’s trading, however, yields lost several basis points again, showcasing the fatigue that’s creeping in after a stellar October rebound. The US eco calendar had market-moving potential. US retail sales for last month came in weaker than expected. The headline series rose 0.4%, beating the 0.3% estimate, but the three core series at first sight underwhelmed. The control group (ex. food, auto dealers, building mats and gas stations) dropped 0.1% m/m vs expectations for a 0.3% rise. But that only happened because September’s reading was revised up sharply, from 0.7% to 1.2% – the biggest monthly advance since January 2023. It’s even more impressive when considering the fact that US retail sales are not adjusted for price developments: inflation in January 2023 was more than 2.5 times higher than it was in September 2024. All other gauges saw material upward revisions as well. Cyclically sensitive components such as auto sales rose at the quickest pace in three months. The NY Fed’s Empire State manufacturing index was published simultaneously and crushed expectations: 31.2 in November vs an expected flat outcome and compared to -11.9 in October. Prices paid eased slightly, but new orders and shipments surged after a poor last month. The employment component snapped a three-month recovering streak though (4.1 to 0.9). The six months ahead gauge fell from 38.7 to 33.2 but the uptrend remains intact amid strong expected demand. Employment came in at the highest level in more than a year, offsetting some of the weakness seen in the current conditions indicator. The data combo hurled US yields towards new intraday highs. They add between 2.6 to 6.2 bps in a bear steepening move. It even inspired German rates with the front adding 5.4 bps. The US dollar recoups (some of) its previous losses. The trade-weighted index holds below the 107 big figure. EUR/USD returned to yesterday’s close around 1.053. The Japanese yen outperforms (on risk-off) today, along with the Norwegian krone. EUR/NOK drops to 11.69, the lowest level in a month. We suspect that the recent uptick in gas prices has something to do with it. Dutch natural gas futures jumped to their highest level on a year amid supply concerns. Chilly weather and slumping energy production from renewal sources (sun, wind) causes (European) countries to dip into its gas storage faster than what is usually the case.
News & Views
“A gradual rebound in an adverse environment” is the title of today’s released Autumn forecasts by the European Commission. The EC projects this year’s EMU real GDP growth at 0.8%, unchanged from Spring forecasts. The conditions for a mild acceleration of domestic demand and investment appear in place, despite heightened uncertainty. For 2025 and 2026, the EC pencils in 1.3% and 1.6% respectively. Excluding the EU, global growth is projected to hover around 3.5% over the forecast horizon. Growth in the US is seen a bit stronger in 2024 (at 2.7%) before moderating to just above 2% in 2025 and 2026. The outlook for China is slightly weaker than previously expected at 4.9% this year and, notwithstanding the recent stimulus package, to continue slowing down to 4.4% in 2026. India is expected to remain the fastest growing major economy over the forecast horizon. Headline inflation is set to ease from 2.4% this year to 2.1% next year and 1.9% in 2026. Prices of both gas and electricity are expected to decline in 2026 from their 2025 levels.
The Czech National Bank published Minutes of its latest policy meeting at which they lowered the benchmark rate from 4.25% to 4% in a 5-1-1 decision. Vice governor Zamrazilova voted in favor of a pause in the cutting cycle that we might get that at the final meeting of this year, on December 19. She argued that the new forecast saw inflation rising slightly above the upper boundary of the tolerance band in the coming months, and that a potential correction of volatile price items could not be relied on. She additionally pointed out that the new inflation forecast was above the 2% target until mid-2026, a year longer than predicted by the previous forecast. Also the markedly weaker koruna was a reason for putting the rate-cutting process on hold. The combination of the interest rate path and the FX forecast would lead to expansionary monetary policy as early as the Q2 2025, which was another reason for caution given strong upside inflation risks (also housing prices for example). EUR/CZK is going nowhere today at 25.29.
