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Fundamental Analysis

Euro Withstands Soft EMU Inflation Data

Typography
  • European equities eke out decent gains after yesterday's setback. US equities opened with good gains (+/-0.5%) as fears about yesterday's Tech sell-off eased.
  • The world's biggest oil producers are close to extending a deal to curb oil production throughout 2018, OPEC ministers said on Thursday, with more work needed to shrink swollen stockpiles and underpin prices above $60 a barrel. Brent oil rose over $64/barrel
  • India's economy grew at a 6.3 per cent annualised pace in Q3, reversing five quarters of slowing growth and up from 5.7% Y/Y in Q2. The improved figures should prove some relief for Mr Modi as he heads in to the next round of regional elections towards the end of the year.
  • Inflation in the eurozone hit 1.5% this month, up from 1.4% in October, but was weaker than the 1.6% reading economists had expected. Core inflation came in at 0.9%, the same as last month. Unemployment rate fell to 8.8% last month, from 8.9% in September. Unemployment is now at its lowest level since the beginning of 2009.
  • The Swiss Kof economic barometer climbed further in November from last month's seven-year high, topping the highest estimates in a Reuters poll. It came in at 110.3 points, the third consecutive increase and up 0.5% up from October.

Rates

Core bonds trade narrowly mixed

Core bonds traded listless in a tight range, ending narrowly mixed (Germany) to marginally higher (US). On intra-EMU bond markets, peripherals 10-yr yield spreads narrowed 1 to 2 bps. The weaker-than-expected euro area inflation for November was behind the only intra-day movement of significance.

The Bund opened little changed (162.52) and eased slightly in the first couple of hours (162.24 low). A "turnaround" occurred mid-morning when euro area inflation was reported at 1.5% Y/y and 0.9% Y/Y (core) That was weaker than expected and pushed the Bund again above the starting line (162.75 high). However, there was no follow through buying and sideways trading dominated till the closure of our report (range 162.75-162.55). Equities eked out modest gains and oil price went higher, but impact on core bonds was minimal.

During the US session, personal spending and income were in line with expectations and the deflators were close to expectations. As also initial claims were near recent outcomes, the eco data had no noticeable impact on US Treasuries. The T-Note future opened at 124-10+ and trades now at 124-09 with intra-day wiggles negligibly small. At the time of writing, the German yields were flat (5-yr) to 0.9 bp (10-yr) lower. The US yields rose between 0.4 (10-yr) and 0.8 bp (2/5-yr).

Currencies

Euro withstands soft EMU inflation data

Trading in the major USD cross rates showed no clear pattern today. The euro suffered temporary from soft EMU inflation data, but the decline slowed soon. US data were too close to expectations to kick-start a meaningful USD move. USD/JPY (112.40 area) extends its rebound as equities find their composure after yesterday's setback. EUR/USD is going nowhere in the mid 1.18 area.

Overnight, Asian equities traded with substantial losses as tech shares suffered from the Nasdaq correction. The November China PMI (both manufacturing and services) improved, but didn't help sentiment. Japanese equities decoupled from the broader correction supported by yesterday's USD/JPY rebound. The pair traded in the low 112 area. EUR/USD showed no clear trend and traded in the 1.1860/70 area.

European equities started hesitant, but soon decoupled from the Tech correction. The constructive open in Europe prevented a further decline in core yields and also supported the dollar. Mid-morning, USD strength was temporary replaced by euro softness as the EMU November inflation data printed again below consensus at 1.5% Y/Y for the headline figure and 0.9% Y/Y for core CPI. EUR/USD touched an intraday low in the 1.1810 area.

Early in US dealings, the EUR/USD reversed part of the earlier losses as investors counted down to the US data. October spending (0.4%) and income (0.3%) were close to expectations as were the jobless claims. However, markets were mostly interested in the price data of the report. The headline PCE deflator was slightly higher than expected at 1.6% Y/Y. The core PCE was as expected (1.4%Y/Y). The deviations from consensus were too small to trigger a meaningful market reaction. EUR/USD hovers in the mid 1.18 area. USD/JPY trades near 112.30/40, awaiting how (US) equities will perform after recent gyrations.

In a broader perspective, USD/JPY is gradually moving further away from the recent low. A bottoming out process might be developing if equities maintain their composure. EUR/USD also trades off the correction top but the decline still has no strong momentum, despite today's low EMU inflation data.

Sterling maintains constructive bias

Today, sterling extended the gradual rise that started earlier this week as the UK and the EU are said to have reached a provisional agreement on the Brexit divorce bill. Since yesterday, there also plenty of rumours that progress has been made on the delicate issue of the border between Northern Ireland and the Irish Republic. There was not much of additional positive news today. As usual, there were even some headlines downplaying recent progress. However markets are hopeful that a meeting of UK PM May and EU's Juncker on Monday will yield more good news, maybe even an outright breakthrough on the conditions the EU wants to be fulfilled to start negotiations on the future EU/UK relationship. EUR/GBP dropped temporary below the 0.88 barrier. Soft EMU inflation data reinforced this move, but the euro rebounded later in the session. EUR/GBP trades currently in the 0.8815 area. Cable also returned part of the early session gains but still trades comfortably above 1.34 level (mid 1.34).

Author: KBC BankWebsite: https://www.kbc.be/dealingroom
KBC Bank
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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