Markets
Relative market calm this morning was already disturbed sooner than expected by the publication of the UK labour market data. The unemployment rate remained unchanged at 4.3% and November payrolls declined a bigger than expected 35k. However, it was wage growth data catching the eye just two days before the final BoE policy meeting of the year. Average weekly earnings growth (ex-bonus 3M/YoY) unexpectedly accelerated from (an upwardly revised 4.9%) to 5.2%. Aside from the impact of the upward revision this also suggests persistent underlying wage growth. Private sector wage growth even accelerated from 4.9% to 5.4%. Markets didn’t expect a BoE rate cut at Thursday’s meeting anyway, but the wage data also raise ever more uncertainty whether there will be room for follow-up action at the February meeting (about 60% discounted). UK gilts strongly underperformed German Bunds and US Treasuries with yields rising about 7.5 bps across the curve except for the very long end (30-y +5.0 bps). The rise in yields also helps sterling to further reverse a part of Friday’s correction. Still the gain could have been bigger given the sharp rise in the interest rate differential, especially against the euro. EUR/GBP trades near 0.827 compared to 0.829 at the open this morning. Tomorrow’s UK November CPI data for sure won’t go unnoticed, especially not in case of a upward surprise.
Moves on European and US interest rate markets are much more limited today. German yields are trading between unchanged (2-y) and minus 2.0 bps (30-y). German IFO business confidence unexpectedly declined further (84.7 from 85.6). Even more worrisome, it was due to a further deterioration in the expectations index (84.4 from 87.0). On the other hand, expectations among investors in the ZEW survey improved from 7.4 to 15.7, more than expected. At least for now, there is no reason for markets to already further scale back expected ECB policy easing with the trough seen near 1.75%. In the US, November retail sales were the final important data release before tomorrow’s Fed policy decision. Headline sales printed at a strong 0.7% M/M, amongst others supported by strong motor vehicle sales. Control group sales (less food services, auto dealers, building materials and gas stations) also rose a solid 0.4%. The retail sales report confirms other recent data evidence that especially domestic demand remains solid and that the Fed shouldn’t feel in a hurry to aggressively normalize policy further after gradually reducing restriction with a 25 bps cut tomorrow. US yields are changing less than 1 bp. Despite strong activity data of late, the dollar for now also maintains a ST holding pattern (DXY 106.85, EUR/USD 1.0505). US equities are ceding marginal ground (+/- 0.5%) but the Nasdaq and the S&P 500 still are within reach of the all-time record levels.
News & Views
Minutes of last week’s Brazilian central meeting provided more insight in the decision to accelerate the tightening cycle to 100 bps (to 12.25%) and putting forward similar action in February and March. Central bankers said that upside inflation risks, such as the resilience of services inflation, the deanchoring of expectations and FX depreciation, have materialized. Economic growth remains stronger as well with a tight labour market and higher government spending both boosting consumption. This less uncertain and more adverse scenario required a more timely policy action to maintain the firm commitment to converging inflation to the target (3% +-1.5ppt tolerance band). Central bankers also raised their estimate of a neutral rate to 5%. In the meantime, the Brazilian real keeps setting new all-time lows (USD/BRL 6.15) despite FX interventions by the BCB (today 3rd time in a week). It doesn’t help that the Brazilian government is pushing through its expansive fiscal plans before the year-end without watering stimulus efforts down to soothe markets.
The German debt agency released its issuance outlook of the Federal government for 2025. They intend to sell around €380bn, down from €438.5bn this year and near €500bn in 2023. A total of €240bn is to be raised on the capital market and a further €126bn on the money market. The Finanzagentur targets €70.5bn in 2-yr Notes, an issue volume of €62.5bn for the 5-yr segment, €64bn of 10-yr Federal bonds, €17bn in the 15-yr bucket and finally a total amount of €26bn of 30-yr Federal bonds. The debt-issuance plan includes Green Federal securities of between €13bn and €15bn. An update/confirmation of the issuance plan for the second quarter will be published in March 2025 and subject to change given February parliamentary elections.
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