Markets
This week’s UK developments enlarge the Bank of England’s dilemma tomorrow. On the one hand, the country is going in overdrive to shield the economy/population against the Omicron tidal wave. On the other hand, UK eco data show that the labour market didn’t face the feared setback as furlough schemes ended while inflation is running away. Headline CPI accelerated to the highest level since 2012 (5.1% Y/Y) while core CPI surged to the fastest pace since 1992 (4% Y/Y). Both significantly exceed the Bank of England’s forecasts and 2% inflation target. The British central bank in November misguided markets by not pulling the trigger on a first rate hike despite strong verbal commitments by governor Bailey and chief economist Pill. Recent eco data and guidance since August (“normalization is necessary over the policy horizon to pull (too high) inflation back to target”) suggest a lift-off tomorrow. Omicron uncertainty could be an excuse to delay the call to the February meeting when a new monetary policy report is available. The market is split, but we slightly favour a rate hike tomorrow. Sterling and short term UK yields went somewhat higher over the past two days. EUR/GBP traded below the 0.85 big figure. The UK 2-yr yield bounced off 0.4% support yesterday and currently test the short term downward trend line just north of 0.5%. A rate hike would lift the UK 2-yr yield out of this closing triangle pattern (see graph).
Global investors remain in wait-and-see mode ahead of Fed (tonight) and ECB (tomorrow) policy meetings. Mixed US eco data had no influence. December Empire Manufacturing business survey unexpectedly strengthened from 30.9 to 31.9. Details were less bullish than the headline reading suggested though with new orders and employment for example falling. Headline retail sales rose a smaller than forecast 0.3% M/M following a bumper 1.8% M/M in October. The retail sales control group – proxy for consumption in calculating GDP – even registered a small monthly decline (-0.1% M/M). Finally, import (0.7% M/M & 11.7% Y/Y) and export prices (1% M/M & 18.2% Y/Y) accelerated further in November. EUR/USD trades on the weak side near 1.1250, but intraday dynamics lack real strength. Core bonds lose some ground for a second session straight. US yields add 2 bps (2-yr) to 3.2 bps (20-yr) across the curve. The German yield curve bear steepens with yields rising by 0.9 bps (2-yr) to 3.3 bps (30-yr). 10-yr yield spread changes vs Germany narrow by up to 2 bps with Greece outperforming (-10 bps). Most European stock markets recover around 0.5%.
News Headlines
Canadian inflation in November rose the expected 0.2% m/m to be up 4.7% y/y, stabilizing at the two-decade high it hit in October. Food, shelter and clothing were the biggest drivers. The average of core measures came in at 2.73% y/y, up from to October’s 2.67%. With inflation now for an eight month straight above the BoC’s 1-3% control range, pressure to kick off a tightening cycle continues to build. Markets currently discount about five rate hikes in 2022. The Bank of Canada’s next meeting is due in January. The Canadian dollar trades little changed in the wake of the inflation release. USD/CAD ekes out a small gain to 1.288 currently with most (FX) markets trading stoic ahead of the Fed later today.
The surge in European gas futures eased today after soaring from €90/MWh from the beginning of this month to €128 yesterday. The almost 40% jump was a combination of high demand (ahead of the winter and low European inventories) and geopolitical tensions with key gas supplier over Ukraine building. Prices marginally fall to €128 after gas flows to the Mallnow point in Germany via Russia’s Yamal-Europe pipeline rose to the highest level since November 21. Flows were effectively reduced to zero at the beginning of November before rebounding somewhat. Compared to previous years, flows are still low though.
