Markets
US headline inflation in December hit the expected 4-decade high of 7% mark yesterday, even as energy and natural gas prices – a month’s-long driver – eased month over month. In another sign of broadening price pressures, the core gauge accelerated more significantly from 4.9% y/y (0.5% m/m) to 5.5% y/y (0.6% m/m). Housing costs/rents, which make up some 40% of the core basket, are becoming an ever-bigger contributor. The figures convinced more Fed governors, Daly and Barkin, to side with colleagues arguing for a March rate lift-off. St. Louis Fed president Bullard called for four rate increases and added that he thinks the balance-sheet reduction should happen in tandem.
Despite growing evidence of sooner Fed action, US bond yields initially fell across the curve in a buy-the-rumour, sell-the-fact market reaction. Yields clawed back though, finishing the day 0.8 (10y) to 5.7 (5y) bps higher. The real 10y yield undid Tuesday’s 9 bps drop. German yields eased in sympathy with the US’ but they mostly missed out on the American late-session comeback. The curve bull flattened with changes ranging from -0.9 bps (2y) to -4 bps (30y).
Unlike US yields, the dollar held on to post-CPI losses. We saw the greenback losing momentum over previous weeks. Another high inflation reading yesterday provided a profit-taking opportunity. It turns real (policy) rates more negative, erodes the USD’s value and – taking into account effects of tighter monetary policy come with a lag – will probably do so for some time still. EUR/USD pierced through minor 1.1386 resistance, then took out 1.1422 (June 2020 interim high, upper bound of the upward sloping trend channel) to finish at 1.1442. USD/JPY slipped below 115 while the trade-weighted DXY tentatively gave up support from the upward sloping May-Nov 2021 trendline around 95.
Stocks in Europe did well with 0.8% gains. Sentiment on WS was less ebullient. A choppy session ended with minor gains of 0.1-0.3%. The muted US equity session and little overnight news leaves Asian traders with few clues for trading. Stock moves are mixed. China underperforms (-1.5%). The story about ailing Chinese property firms every once in a while pops up. Today it is because they face a wave of important payments on which they may or may not default, eg by the Evergrande Group. Core bonds erase early weakness to trade near yesterday’s closing levels.
Fed vice-chair to-be Brainard appears before the Senate for her nomination confirmation later today. She’ll stress that fighting inflation is the Fed’s most important task. We keep an eye at the $22bn 30-year auction tonight. Yesterday’s 10y sale tailed slightly and bidding metrics weakened a bit. It marked the start of the intraday turnaround in yields. Core bond’s technical picture still suggests short-term minor downward momentum although moves may not go very far. FX markets are extremely quiet. EUR/USD hovers at the 1.1441 close. We’re keen to see whether the repositioning of dollar-bulls continues. 1.146 (23.6% recovery of the Jan-Nov decline) is the first mark but a return above 1.1495 (March 2020 correction high) would turn the technical picture neutral again.
News Headlines
Hungarian PM Orban capped prices of six basis food items (sugar, flour, sunflower oil, chicken breast, pork leg and milk with a fat content of 2.8%) by announcing that they should be sold at October 15 price levels in all stores starting next month. The measures aim to fight off the impact of inflation (7.4% Y/Y in November) on households’ disposable income. Earlier actions include capping fuel prices and freezing mortgage rates. Orban extends its spending spree of the past two years in a push to gain the advantage in a close election race which will be decided in April. The Hungarian finance ministry yesterday announced that the 2021 budget deficit amounted to HUF 5.1tn (around 7.5% of GDP), the second largest since 1997. The month of December alone accounted for HUF 1.2tn of that shortfall. The forint enjoyed a nice rally since the start of the year, taking EUR/HUF down from 370 to below 355. It allows the Hungarian central bank to keep the one-week deposit rate stable today for a second consecutive time at 4%. December inflation numbers are out tomorrow.
