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Sunset Market Commentary


Markets were clearly counting down to US payrolls. Unfortunately, the November edition was a “on the one hand, on the other hand” and didn’t bring much inspiration to traders. Employment rose with 210k, the smallest increase this year and well below the 550k consensus, even if you take into account the 82k upward revision for the two previous months. Job growth in leisure and hospitality eased considerably to 23k compared to the 242k average for 2021 (Jan-Oct) so far. Professional & business services (90k) were the biggest contributor in the services sector last month while retail shed 20k jobs. The goods-producing sector added 60k jobs with construction and manufacturing equally responsible for the increase. There was some good news too though. People came from the sidelines to the labour market, resulting in a rise of the participation rate to 61.8%. Employees might be drawn by further increasing wages (0.3% m/m to be up 4.8% y/y). The unemployment rate dropped more than expected from 4.6% to 4.2%, a new post-pandemic low. This is at odds with the fairly low job growth but bare in mind both come from different sources (BLS vs. household survey). In fact, the household survey showed a whopping 1136k job increase! The disappointing headline figure prompted a knee-jerk move in core bond yields and the dollar. Lingering uncertainty about omicron and what it may mean for the recovery going forward probably added to the move. All reversed quickly though. Today’s labour market report may be not as strong as hoped for but it won’t bring the Fed off track in quickening the pace of tapering next month which brings forward the timing a first rate hike. US bond yields now trade higher than before the release with changes varying from 0.8 bps (10y) to 3.3 bps (2y). German yields add about 1 bp across the curve in directionless trading. EUR/USD trades stable near the 1.13 big figure with the improving risk environment hanging in the balance with USD short-term interest rate support.

The Bank of England’s most prominent hawk took a dovish turn. Saunders said the omicron strain is the crucial issue for the December policy meeting, adding that there could be “particular advantages in waiting to see more evidence on its possible effects on public health outcomes and hence on the economy”. The latest string of UK economic data (labour market, CPI, retail sales …) made the start of the BoE tightening cycle in December all but certain. But since news about omicron got out last Friday, markets started paring back bets and continued to do so after Saunders’ speech. They now see a 50% chance of a 10 bps hike in December. There is more conviction on a first, full (25 bps) hike in February. Losses for the pound were limited. EUR/GBP is changing hands around 0.852.News Headlines

Turkish November inflation accelerated by 3.51% M/M to 21.31% Y/Y (up from 19.89% in October). Core inflation intensified from 16.82% to 17.62%. Both printed higher than expected. Upward pressures in producer prices were even more impressive, with PPI rising 9.99% M/M and 54.62% Y/Y (from 46.31%). The sharp rise probably mirrors higher import prices due to the weak lira. Higher inflation further deepens the negative real policy rate after the CBRT cut it to 15.00% from 19.00% since September. The lira weakened to EUR/TRY 15.69 after the publication of the release before the CBTR again intervened to address ‘unhealthy price formations‘. Any relief for the lira was modest and short-lived. EUR/TRY currently again trades near 15.55.

Canadian net employment grew 153.7k in November compared to 31.2k in October and market expectations for a rise around 37k. Both full time (79.9k) and part time (73.8) employment rose. Job creation was mainly driven by strong hiring in the services sector. The unemployment rate nosedived from 6.7% to 6.0%. The participation rate stabilized at 65.3%. The Canadian dollar recently suffered from the overall uncertainty and the oil price decline. The loonie today rebounded with USD/CAD declining from 1.282 to 1.274. Further improvement in the labour market reinforces the case for the BoC to start an interest rate lift-off next year. The BoC indicated a possible start in the second or third quarter. Markets discount a first hike already at the end of Q1.

KBC Bank
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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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