Markets
Reuters and Bloomberg yesterday each ran an exclusive story on PEPP options at the ECB meeting next week in order to prevent a monetary cliff after the programme ends in March. Sources with Reuters floated either creating a new envelope to be spent over the rest of 2022 or raise asset purchases under APP temporarily before scaling back again as the year progresses. Bloomberg, citing officials, said the ECB is mulling the idea of applying PEPP’s flexibility to its reinvestments (due to run until end 2023), both in terms of geographic allocation and timing. In an example, the ECB could decide to funnel proceeds of maturing German Bunds to Italian BTP’s but it may keep that fire powder dry for a while and use it a time of distress. Being wrongfooted in the past, markets didn’t do much with both articles. Declining core bond yields were mostly the result of an overall risk-off trading session. European stocks edged 0.6% lower, losses on WS were as much as 1.7% (Nasdaq). German yields fell 2.5 bps (2y) to 4 bps (10y). The US curve flattened with changes of +0.7 bps (2y) to -3.1 bps (20y). Weekly jobless claims plunged to a 52-year low, explaining some UST underperformance. The 30y bond yield (-1.6 bps) reversed earlier losses partially after a huge tail in the $22bn auction. EUR/USD losses accelerated when US dealings got rolling. The currency pair closed near 1.129 support (from 1.134). EUR/GBP eased from the high 0.85 area back to the middle zone, mainly on sterling strength even as a BoE rate hike is in doubt. The 2y yield closed at the level after the central bank backtracked in November.
China’s yuan is grabbing some market attention this morning. The PBOC is growing ever more uncomfortable with the strong currency. It raised the reserve requirements for foreign currencies yesterday (causing a yuan weakening) and set the daily fixing for a second day straight weaker than expected. The difference with market estimates was the largest on record even. USD/CNY gapped higher but retraced completely in the meantime. USD/CNY trades near the 3-year high of 6.36. Other currencies trade muted as do core bonds. Stocks drop 0.5-1%.
Finally some interesting data today. US Michigan consumer sentiment dropped to 10 year low last month on rising inflation concerns. Consensus expects the indicator to recover only very marginally from 67.4 to 68. If inflation was the cause, then there’s little reason to expect a major confidence boost indeed. US CPI probably accelerated in November to 6.8% (4.9% core). Market impact could stay limited though since the Fed already made very clear it will step up the normalization pace. Money markets discount three hikes next year. Sentiment may thus remain key for core bond yields. EUR/USD has poor cards to play with and we don’t expect a strong boost ahead of the ECB next week. Sterling faces similar central bank uncertainty but it may keep the balance stable against a weak euro.
News headlines
At a news conference, governor Glapinski of the National Bank of Poland took a cautious stance on further policy tightening. The NBP on Wednesday raised its policy rate by 0.50% to 1.75%. According the NBP governor, there is significant room to raise rates further if necessary, but the MPC doesn’t state unequivocally that the NBP is engaged in rate hike cycle as several uncertainties are still in play. The MPC doesn’t pre-commit and calibrates hikes to avoid a slowdown. On FX interventions, the NBP aims to use the tool to smooth out volatility. Glapinski indicated that the NBP has no target for the zloty and is happy with its current level. The NBP doesn’t plan QE auctions for now. The zloty yesterday gained slightly in a daily perspective but the reaction to the press conference was muted. EUR/PLN closed at 4.6025.
The US Senate on Thursday took an important procedural step to raise the US debt limit and avoid a US default later this month. With the backing of 10 Republicans, the US Senate by a 59-35 majority vote approved a bill that, after being rubberstamped by president Biden, will allow the Senate to raise debt ceiling by a simple majority on a one-time basis. Usually, raising the debt ceiling needed a 60-vote majority in the Senate. The legislation also stipulates that the debt ceiling should raise the limit by a specific amount, not for a certain period.
