Market movers today
The market highlight today will be the US CPI for November. We see upside risks to consensus expectations and look for a decline in headline inflation to 7.4% (from 7.7% in October) on the back of lower energy prices, but with core inflation holding steady at 6.3%. Further signs of peak inflation should strengthen the case for Fed slowing the hiking pace to 50bp at its meeting tomorrow, but an upside surprise could trigger another repricing of a higher terminal rate in 2023. With the latest easing in financial conditions and still strong labour market conditions, we think more tightening will be needed (read more in Fed Preview – Tightening pressure persists into 2023, 8 December).
In the euro area, ZEW expectations are on the agenda and it will be interesting to see whether sentiment improved for a second consecutive month in December.
The 60 second overview
Market sentiment: Calm sentiment continued ahead of the key US CPI release today and central bank meetings starting from tomorrow. The New York Fed’s consumer survey signalled easing inflation expectations yesterday, with 1y expectation declining to 5.2% (from 5.9%) and 5y to 2.3% (from 2.4%), somewhat more optimistic than the last Friday’s University of Michigan survey, which showed 5y expectations still elevated at 3.0%. Overall the strength in the latest round of data, including the November Jobs Report as well as the last week’s ISM services and November PPI, still suggests that Fed’s communication should remain on the hawkish side tomorrow despite the more moderate hiking pace.
China: November credit growth was weaker than expected, as aggregate financing growth slowed down to 10.0 y/y (from 10.3%). The stimulus measures still supported the M2 money growth, even though investments remain weak. That being said, the optimism around reopening will likely be more important than the current data in the near-term, and for example oil prices edged higher yesterday amid prospects of recovering demand. On the political front, yesterday China launched a trade dispute at the WTO against the US over the export controls of microchips announced in October. The announcement marks another step towards weakening bilateral ties between China and the US, which we have expected to remain tense (see Research China – CPC Congress cements Xi’s power – and US-China rivalry, 24 October).
FI: Yesterday’s rates markets can best be characterised by a wait-a-see session ahead of today’s US CPI and the central bank meetings on Wednesday and Thursday. 10y EGB yields ending virtually unchanged on the day. EUR curves pivoted around the 7-10y point with short end selling off by 5bp only late in the session on no apparent news or central bank comments as most are in blackout. 30y point declined 3-4bp.
FX: Brent oil strengthened 5% intraday from the trough yesterday, which helped support commodity currencies somewhat. Otherwise an FX trading session mostly characterized by positioning before today’s US CPI with EUR/USD closing flat on the day despite a trading range of one big figure. As for today, we expect markets to sit tight early in the session and later take its cue from the US CPI figure.
Credit: Yesterday, credit markets continued the cautious sentiment ahead of the US CPI report for November, leaving iTraxx Main unchanged (+0.1bp) at 89.4bp, while iTraxx Xover widened by 5.5bp to close the session at 464.1bp. In addition, the primary market activity was relatively muted.
