A third consecutive session of low trading volumes saw US Treasuries jump significantly higher. After a calm European trading session, the final figure of third quarter unit labor costs (I kid you not) lightened the fuse. The figure was downwardly revised from 3.5% Q/Q to 2.4% Q/Q and seen as evidence that second-round inflation effects aren’t at play. This suggests that the Fed won’t be as aggressive against inflation as it says it will be, instead leaving scope not to slam the brakes against the background of a looming recession. It’s the markets’ narrative/hope since mid-October and the wager going into the final Fed meeting of the year is only growing. We still think that markets and the Fed are on collision course. Don’t fight the Fed, they say. The intraday Treasury rally accelerated as the US 10-yr yield fell below 3.5% support (previous cycle peak in June) while the Bank of Canada hinted at a potential pause in its tightening cycle after a 50 bps rate hike to 4.25% (see below). US yield eventually lost 11 to 13 bps across the curve on a daily basis. The US 10-yr yield tested 50% retracement on the August/October move higher (3.42%) which coincides with an incoming downward trend line, connecting end-October, mid-November and early-December sell-off lows. The German yield curve turned less inverse with daily yield changes fluctuating between -5.5 bps (2-yr) and +1.6 bps (30-yr). The German 10-yr yield tested the October low at 1.77% with 50% retracement on the August/October move higher still some way off at 1.61%. US stock markets closed a third consecutive day with losses, though they were very limited this time. The S&P 500 manages to hold above first support in the low 3900-area. The trade-weighted dollar lost interest rate support and ground with DXY sliding from 105.50 to 105. EUR/USD closed at 1.0506 from an open at 1.0467.
Today’s eco calendar is again extremely thin with only US weekly jobless claims. With the Fed already in blackout period ahead of the FOMC, it leaves scope for more sentiment-driven trading. Final ECB speeches ahead of their purdah come from the Lady herself and her lieutenants de Cos and Villeroy. We don’t think that they’ll alter market expectations about a 50 bps ECB rate hike next week.
The Bank of Canada raised its policy rate by 50 bps to 4.25%. Analysts and markets were split between a 25 bps and a 50 bps rate hike going into the meeting. Quantitative tightening also continues. CPI inflation at 6.9% shows that Canadian citizens still face large price increases. Q3 growth was also stronger than expected and the economy continues to operate in excess demand. Unemployment stays near historic lows. Even so, the BoC sees signs that inflation might ease and takes a more neutral stance on further policy steps. Growth in Canada will probably come to a stall at the end of this year and in the first half of next year. Three-month rates of change in core inflation have come down, an early indicator that price pressures may be easing. In this context, the BoC will be considering whether the policy rate needs to rise further to bring supply and demand back into balance and return inflation to target. Canadian 2-y yield initially jumped more than 10 bps intraday, but in line with the broader trend closed marginally lower at 3.78%. The loonie after a brief uptick also closed little changed at USD/CAD 1.365.
The National bank of Poland as widely expected left its policy rate unchanged at 6.75%. Polish inflation decreased in Y/Y terms in November to 17.4% mainly due to lower energy and fuel prices, but there is still pass-through of higher commodity prices into consumer prices. Enterprises also rise prices to cover higher operating costs. As global and Polish growth is expected to slow substantially, the hitherto significant monetary policy tightening by NBP is expected to support a decline in inflation towards the NBP inflation target even as inflation will stay high in the short term. The NBP repeats that an appreciation of the zloty in line with fundamentals would accelerated the decrease in inflation. The NBP remains prepared to intervene in the FX market. The zloty yesterday closed little changed at EUR/PLN 4.69. Markets see room first a first rate cut toward the end of 2023.