Markets
Core bonds only return part of Friday’s massive gains in today’s unexciting opening session. Main moves so far occurred during Asian dealings with markets drifting during the European session. Empty eco calendars on both sides of the Atlantic obviously couldn’t color trading. The risk climate is more beneficial following a flagged RRR cut by the PBOC (see below) and as the Chief Medical Adviser to US President Biden (Fauci) said that early reports on the omicron variant of the coronavirus suggested that it could be less dangerous than the ruling delta variant. Main European equity indices gain over 1%. German yields are rising up to 1.5 bps across the curve. The German 10-yr yield remains below the critical -0.35% mark, lost last week. Italian BTP’s outperform in the peripheral space with the spreads vs Germany narrowing by 3 bps. The move comes as rating agency Fitch upgraded the country’s rating from BBB- to BBB (stable outlook), citing higher-than-expected growth in 2021 (6.2%), before Italy reaches its pre-Covid GDP level in Q1 2022. GDP forecasts for 2022 and 2023 are respectively 4.3% and 2.3%. High vaccination rates, high levels of private sector savings and EU recovery fund money all contribute to growth. The rating by Fitch is now in line with the one at S&P (positive outlook though) while Moody’s is the only one to retain the lowest available investment grade rating (Baa3 with stable outlook). US yields add 1.9 bps (2-yr) to 3.3 bps (7-yr) across the curve with the belly slightly underperforming against the wings. The US 10-yr yield remains below 1.41%. Damage for US T’s could have been bigger in the run-up to the Treasury’s mid-month refinancing operation which starts tomorrow with a 3-yr Note sale, but includes more tricky 10-yr Note and 30-yr Bond auctions on Wednesday and on Thursday. EUR/USD switched sides again around the 1.13 big figure, spending most of the day in an extremely narrow range of 1.1280-1.1310. EUR/GBP turned south in the better risk environment, currently changing hands around 0.8520 from a 0.854+ open. BoE’s Broadbent said that he remains out on backing a rate hike next week with the omicron virus providing additional economic uncertainty. He did mention upside inflation risks coming from rising wages with the labour market being tighter than key figures show and as the end of furlough schemes hasn’t loosened the jobs context. JPY (USD/JPY > 113) and CHF (EUR/CHF > 1.04) are today’s main underperformers in FX space.
News Headlines
The People’s Bank of China today announced to reduce the Reserve Requirement Ratio (RRR) for banks by 50 bps, starting on December 15. The action will reduce the amount of cash that banks will have to put aside by about 1.2tn yuan (+/- $188bn). However, part of this amount will be used to repay loans under an expiring medium term loan facility. It was the second cut in the RRR this year after a reduction in July. The move was flagged recently by Prime Minister Li Keqiang as he indicated that authorities would take action to support smaller companies. According to the PBOC, the weighted average RRR will be at 8.4%. The RRR cut comes as Chinese authorities try to cope with a slowdown in growth and with the fall-out from a (liquidity) crisis in some parts of the real estate market. In this respect, comments from a meeting of the Polity Bureau reported that the government will ‘support the commercial housing market to better meet buyer’s reasonable housing needs’. The government also was said to facilitate a healthy development of the property market, which might be an indication that authorities could become less strict on the sector after recent turbulence. The yuan eased slightly this morning with USD/CNY trading near 6.3775.
Czech retail sales printed stronger than expected in October. Sales in constant prices rose 0.3% Y/Y. The core figure excluding motor vehicles even rose 5.6% Y/Y from 3.7% Y/Y. Food and beverages declined slightly (-2.7% Y/Y), but sales of automotive fuels (13.4%Y/Y ) and other (non-food) good (10.0% Y/Y) accelerated. Sale and repair of motor vehicles declined 11.8% Y/Y. This solid retail sales report comes as the CNB is pondering the pace of further rate hikes as inflation is still accelerating while at the same time corona developments might hamper growth short term. EUR/CZK today trades little changed near 25.43.
