Markets
US markets are closed for Thanksgiving so the focus turned to Europe instead. Inflation prints were due in Belgium, Spain and Germany ahead of tomorrow’s EMU figure. Spanish CPI flatlined month on month in November but accelerated in yearly terms to 2.4% due to base effects. Core inflation in the country ticked lower, from 2.5% to 2.4% vs the 2.6% consensus estimate. German prices eased by a more-than-anticipated 0.7% m/m, allowing the y/y figure to match October’s 2.4% instead of accelerating to 2.6% analysts were projecting. Basket heavyweights Italy and France have yet to report tomorrow, but these national inflation numbers so far suggest some downward risks for the EMU. But even if that would be the case, it doesn’t necessarily imply lower bond yields. Today’s price movement is indicative: German yields barely budged during the releases with less than 1.5 bps of declines at the front end. With markets pricing in an ECB policy rate trough of around 1.75%, there’s simply no room left to stack up easing bets. The influential central bank board member Schnabel was pretty vocal about that in yesterday’s interview. Her French counterpart Villeroy felt the urge to balance it out a little though. He wants full optionality on the frequency & size of cuts and doesn’t exclude going below neutral. His comments triggered additional Bund gains, pushing yields now down 3.2 bps (2-yr). Moving into another corner of the bond market: OAT’s. French bonds are suddenly back in the center of attention these last couple of days. A limped minority government looks increasingly incapable of pushing through the 2025 budget that seeks to do something (reducing next year’s deficit from 6%+ to 5%) to the dire state of public finances. Other then spreads vs. Bund and swap rising to new multi-year highs recently, France today is less than a basis point away from borrowing at a higher rate than … Greece. French finance minister Armand this morning said the government is prepared to amend the budget in order to avoid the Rassemblement National joining forces with the far-left in a motion of no confidence. The flipside is less fiscal consolidation that could put financial markets on high alert. The political sage is another unwelcome development for the euro. Any recovery is bound to run into resistance soon. EUR/USD already pares some of yesterday’s gains to trade around 1.0533, be it in holiday-thinned trading. EUR/GBP eases towards 0.832.
News & Views
Belgian headline inflation slowed to 0.17% M/M in November, with the annual figure stabilizing at 3.2%. The increase in inflation in recent months is the result of the extinction of the impact of the basic package for electricity and natural gas. Energy inflation rose from 7.26% Y/Y to 9.44%. This effect will play until February 2025. Other significant (monthly) price increases concerned clothes, household appliances and repairs, holiday villages as well as bread and cereals. Price drops were mainly registered in the transport sector. Core inflation fell back to its September level (2.8% Y/Y), reversing the October increase to 3.01%. Both services (3.52% from 5.97%) and inflation for rents (4.59% from 4.50%) was lower this month on an annual basis. Food inflation rose by 0.3% M/M but fell from 1.86% Y/Y to 0.80% Y/Y, mainly because of the base effect. The first inflation estimate according to the European HICP flash estimate for Belgium amounts to 4.9% in November 2024.
The Brazilian real weakened to USD/BRL 6 for the first time ever. The latest move followed Finance Minister Haddad’s proposal of $12bn in spending cuts. Too little and too late, argues the market. Brazilian public finances have been stretched since President Lula da Silva regained office in 2023 pledging to improve living standards. Significant weather events dug even deeper holes. The fiscal spending drift led to a new increase in inflation (expectations), forcing the Brazilian central bank into a U-turn. The BCB cut its key selic rate from a 13.75% peak level to 10.50% between August 2023 and May 2024. In September and November, they reverted to rate hikes of respectively 25 bps and 50 bps. BRL weakness adds to the inflation worries suggesting more tightening can be expected.
