Markets
Investors remain in (a defensive) wait-and-see mode ahead of policy decisions by the Fed, the ECB, the BoE and the BoJ. There were no important EMU data. US NFIB small business confidence improved slightly from 98.2 to 98.4, but the report shows no euphoria, on the contrary. NFIB Chief economist Dunkelberg as quoted: ‘As the end of the year nears, the outlook for business conditions is not encouraging to small business owners as lawmakers propose additional mandates and tax increases’. Rampant inflation and supply chain disruptions, was also mentioned as hampering small business activity. The net percentage of businesses expecting a better economy falls to -38%, the lowest since 2012. The content and the tone of the report shows a different picture compared to strong ISM’s. Contrary to last week’s at-consensus US CPI, PPI inflation unexpectedly accelerated further (0.8% M/M and 9.6% Y/Y headline). After a hesitant first reaction, US yields are rising between 3 bps (2-y) and 5.2 bps (30-y). German yields also show a ‘technical’ rebound (+ 2.5 bps across the curve). Changes in 10-y peripheral spreads show no big moves, but tentative tightening in Italy (-2 bp), and Greece (-4bp) suggests that markets still hope for persistent ECB backing even in the post PEPP era. The rise/tentative steepening in US yields hardly removed ‘uncertainty’ for equity investors (EuroStoxx 50 currently -0.25%; US indices also opened again in red).
In FX, the rise US yields annex risk-off, this time doesn’t help the dollar. EUR/USD before the US open already enjoyed a short-squeeze lifting the pair from 1.127 to the 1.1320 area. Again, no technically important levels were touched. At EUR/USD 1.13, the lethargy pre-Fed/ECB persists. This also applies to EUR/GBP trading. Data this morning showed employment continued to growth even as the furlough scheme ended. November jobless claims also declined faster than expected. Even so, with uncertainty on the impact of omicron building, it won’t be evident for the BoE to find the appropriate timing for reducing interest rate support. The IMF advocates that the UK is in a good position to reduce monetary and fiscal support as inflation is expected to hit 5.5% in spring. Action now would create policy space in a longer term horizon. Question is how much weight BoE members will give to the IMF’s assessment on Thursday. EUR/GBP trades little changed near 0.854, with the 0.85/0.86 corridor still intact.
News Headlines
The German Ifo Institute published its Winter forecast. Compared with the Autumn release, they kept this year’s GDP forecast unchanged at 2.5%, but the fourth wave of the coronavirus and production difficulties in manufacturing explains the downward revision to the 2022 GDP prognosis (3.7% from 5.1%) and the upward change for 2023 (2.9% from 1.5%). The German Economy Ministry also warned for a tough winter and increased short term economic risks. Consumer prices are likely to continue to rise noticeably over the coming year. The cost increases associated with supply bottlenecks and delayed adjustments to higher energy and commodity prices will play a driving role. Ifo expects average inflation to rise from 3.1% this year to 3.3% next year before falling back to 1.8% in 2023.
The Hungarian central bank raised the base rate with 30 bps to 2.40%. It stepped up the overnight deposit rate to the same level (+80 bps) while raising the overnight lending rate with 30 bps to 4.40%. Doing so, the MNB turns the interest rate corridor asymmetric with upside scope only. The move highlights the central bank’s determinacy to fight inflation and second-round effects as inflation rose to 7.4% in November. While the MNB expects headline prices to have peaked last month, it sees core inflation rising further to 6% mid-2022. The MNB’s current preferred tool, the one-week deposit rate to suck up HUF liquidity, on Thursday will be raised by at least as much as today’s base rate increase, it said (ie. from 3.3% to 3.6%). Additionally, the central bank will stop the reinvestment phase of maturing government bonds, allowing its balance sheet to roll off. The Hungarian forint in a first reaction was disappointment but recovered after the additional measures in the press release went public. That said, EUR/HUF still trades historically high north of 365/366.
