All eyes were on the US Friday. Michigan consumer sentiment in December barely recovered from a 10-year low to 70.4, slightly more than the 68 expected. The survey showed inflation remains a top worry for US consumers and data earlier on the day showed rightly so. US November CPI quickened from 6.2% to 6.8% y/y (4.6% to 4.9% in core measures), spot on consensus. Some anticipated an even higher rise, causing a small correction at the short end of the yield curve in particular. US yield changes ranged from -3.3 bps (2y) to -1.5 bps (10y). German Bunds traded listless ahead of the weekend. Yields added about 1 bp across the curve. US stocks inched higher with the S&P500 (+0.95%) closing at a new all-time high. The dollar struggled for direction with high but at-consensus CPI. A benign risk environment and UST outperformance eventually sent EUR/USD just north of 1.13. DXY held steady above 96. UK production failed to leave a mark on GBP trading last Friday. Markets were much more focused on what the Bank of England is to decide this week, causing sterling inertia. EUR/GBP gradually drifted south, finish at 0.853 from 0.854.
Asian markets trade quietly. Equities advance 0.5% on average. Japan’s Q4 Tankan showed confidence especially in the services sector improving. The outlook was still lower compared to the current conditions though, with omicron a reason for concern. The Japanese yen trades mixed this morning. China’s PBOC fixed the yuan again at a weaker-than-expected level. USD/CNY eases nevertheless to 6.36, erasing half of Thursday’s boost. The dollar does strengthen against most G10 peers. EUR/USD again drops sub 1.13. Core bonds erased (much of) early weakness.
We don’t expect much for today. Not only because the eco calendar is already depleted but more so due to the central bank avalanche this week. Uncertainty is even more elevated than usual. It’s a given the Fed on Wednesday will increase the taper pace to pave the way for faster rate hikes, but how many will the new dot plot suggest? The jury is still out whether the Bank of England Thursday will use the omicron cover for kicking the can further down the road. Markets are in a 50-50 split. The ECB on the same day may or may not uncover the details of monetary policy after PEPP ends in March next year. News agencies Bloomberg and Reuters each ran their stories, citing sources, on what’s being discussed. Testament to the uncertainty is how little markets reacted on both. Such indecisive trading (in core bonds, euro, dollar) will likely remain ahead of the first major event on Wednesday. For sterling, tomorrow’s jobs report is definitely worth mentioning as the labour market was cited as a key factor in the BoE’s assessment.
Czech National Bank board member Holub argued that the central bank should hike interest rates by more than 25 bps at least at its next two meetings (Dec 22 & Feb 3). The policy rate currently stands at 2.75%. Holub said in a debate on TV that the peak rate could be as high as 4% during spring, that’s above the CNB’s central forecasts dating back to November. He is worried that the inflation peak could reach 8% at the start of next year, again above current forecasts. November CPI numbers were released last Friday and showed inflation running at 6% Y/Y. The CNB wants to avoid high inflation from becoming anchored over the long term, hence the aggressive tightening cycle. EUR/CZK extends its decline in the 25.20/25.80 trading range, currently changing hands near 25.35. In Poland, NBP member Hardt called for another 50 bps rate hike in January (to 2.25%) in order to help stem inflation. Hardt backed calls from colleagues by saying that he wouldn’t mind a stronger currency. PLN remains historically weak at EUR/PLN 4.62.
Rating agency S&P cut the rating on the Turkish B+ rating from stable to negative. S&P considers that the broader impact of recent volatility on Turkey’s economic outlook remains highly uncertain. In addition, it can’t exclude additional rate cuts. Its base scenario doesn’t include capital controls to stem the lira crisis. Turkey is rated one notch better at Fitch BB-; negative outlook) and worse at Moody’s (B2; negative outlook). The Turkish closed at a new all-time low against the euro on Friday (EUR/TRY 15.76) despite a third attempt via FX interventions to stop the rot.