Markets
News that German parliament was set to approve a record €52bn in military procurement contracts next week extended the latest Bund sell-off immediately at the start of trading, resulting in new cycle/near term highs across the curve. Unlike the past few days, the move lacked technical momentum and triggered some return action. Yesterday’s hawkish Schnabel quotes didn’t gain traction in other public comments. ECB Lagarde has some “closing arguments” tomorrow before the central bank enters its pre-rate decision quiet period. We don’t expect her to back Schnabel’s views (endorsing market/survey expectations that rate hike will be the next ECB move). The EMU eco calendar was empty with December PMI’s (Dec 16) the next and final input before the final central bank gathering (Dec 18). German yields trade 0.7 bps (2-yr) to 1.5 bps (10-yr) lower with the belly of the curve slightly outperforming the wings. Today’s main event risk is the vote on the social security bill in French parliament after closing this report. Failure to pass it would imply a €30bn shortfall for the social security system alone instead of the envisioned €22bn in the bill. It would also endanger the timeline of passing the overall budget and put new question marks around the survival chances of PM Lecornu’s minority government. Risks are probably asymmetric with especially a failure to get the bill through parliament able to trigger a (euro-negative) market reaction.
The US yield curve shows a modest bull flattening with yields 0.6 bps (2-yr) to 2.5 bps (30-yr) lower. The latest NER pulse by ADP research showed private employers adding an average of 4.75k jobs/week for the four weeks ending November 22. The week’s positive number hints at an upswing in the labor market after four straight weeks of negative pulse estimates, though a closer look at the series shows a big negative number in the week ending October 25 dropping out of the equation. In the run-up to tomorrow’s FOMC meeting, the figure failed to move the market needle. In FX space, EUR/USD remains numbed right in the middle of the trading range in place since summer (1.1650 area) while equity markets are treading water for a second session straight. UK Gilts outperformed, the curve bull steepening (up to -4 bps at 30-yr tenor) with weak November BRC retail sales painting a grim picture. EUR/GBP is equally unfazed at 0.8735. BoE policymakers appearing before a parliamentary hearing (Chair Bailey not involved) held close to their mixed personal views.
News & Views
Hungarian inflation slowed further in November from 4.3% to 3.8% Y/Y (vs 3.9% Y/Y expected). As such headline inflation returned within the target 3% +/- 1% tolerance band of the National bank of Hungary (MNB). On a monthly basis, inflation rose by 0.1% (vs flat in October). The MNB contributes the fall in the annual consumer price index primarily to slower price increases for fuel and unprocessed food (+9.8% Y/Y). At the same time, the MNB’s underlying inflation measures remained broadly unchanged in Y/Y-terms. Sticky-price inflation and core inflation excluding processed food was 5.4% Y/Y and 4.6% Y/Y, respectively. Price of tradables were unchanged M/M and eased slightly to 2.6% Y/Y. Markets services prices printed at 0.3% M/M and 7.2% Y/Y (from 7.4%). The MNB indicated that households’ inflation expectations remain at a higher level than during the period when the inflation target was achieved pre-Covid. The slowdown in inflation is at least partially due to government measures to cap the prices of some essential consumer prices. In this respect, today’s data probably won’t be enough for the MNB to change its bias that some policy tightness is still needed to address underlying inflationary pressures and financial stability. The forint regains a small part of yesterday’s correction after Fitch cut the rating outlook to negative (EUR/HUF 383.75)
US president Trump in an interview with Politico said that he didn’t promise Hungarian Prime Minister Orban a financial safety net of up to $20bn. Orban said the country would be able to activate such backup in case of speculation against the forint. Trump admitted that Orban had asked for the shield but didn’t give any concrete indication whether such assistance was still to be considered in the future.
