UK labour market data kicked off today’s trading day. Employment, based on the labor force survey, rose by 27k in the three months to October, beating the consensus estimate of a 17k decline. The unemployment rate rose during the same period to 3.7% with participation outpacing employment. Wage growth accelerated from 5.8% Y/Y to 6.1%. November data suggested that the labour market remains strong with payrolls rising by 107k (vs 42k expected). A decline in vacancies (from very high levels) indicates that demand for labour nevertheless seems to be slowing down. The strong labour data triggered an early underperformance of UK Gilts going into Thursday’s BoE meeting. The UK 2-yr yield touched 3.55% for the first time since the end of October. Sterling holds the slightest of advantages against the euro, holding below the 0.86 big figure, but without really testing the strong support zone around 0.8560. We have the impression it won’t take much from the BoE to force a technical break. That is in case tomorrow’s UK CPI numbers fail to do the trick.
US November CPI was the main dish. Headline inflation slowed to 0.1% M/M with the core rising by 0.2% M/M. Both were below consensus (0.3%) with the latter being the slowest pace since August 2021. Headline inflation growth decelerated more than forecast: from 7.7% Y/Y to 7.1% Y/Y (vs 7.3% expected) with the core down at 6% Y/Y (from 6.3% vs 6.1% expected). Details showed that shelter (0.6%) was by far the largest contributor to the overall CPI gain with food prices also up 0.5%. Core goods prices fell for a second month in a row (-0.5%) and also energy prices declined (-1.6%). The market reaction was huge. Corrections since mid-October resumed with markets anticipating the Fed won’t be able walk its own hawkish talk. US Treasuries outperform German Bunds. US yields lose 7.7 bps (30-yr) to 20 bps (3-yr). The US 2-yr yield is at risk of permanently losing the neckline of a multiple top formation at 4.25%. The US 10-yr yield tests 50% retracement on the Aug/Oct leap higher at 3.42%. Changes on the German curve range between -2.2 bps (30-yr) and -8.2 bps (2-yr). The dollar pays the price. EUR/USD sets a new recovery high above 1.0650 (from 1.0550). Key resistance kicks in at 1.0747/1.0806 (62% retracement on this year’s decline & March low). The trade-weighted dollar fell below this month’s low (104.11) to trade below 104 for the first time since end June. Even USD/JPY loses almost 3 big figures, changing hands at 135. US stock markets opened 1.5% to 3% higher with European gains ranging between 1% for the FTSE 100 and almost +2.5% for the EuroStoxx50.
The Bank of England in its half-yearly Financial Stability Report warned that higher inflation and borrowing costs will put significant pressure on households and businesses while the UK is entering a lengthy recession. Around 4 million households were likely to face higher mortgage payments in 2023. But just 2.4% of the families are expected to find it hard to afford, keeping the risk of widespread defaults contained. It’s a smaller proportion than in the 1990 or 2008 recession, in part because of more fixed-rate mortgages and stricter lending regulations. This makes them more resilient than before. Businesses and banks, too, are described as well positioned to withstand the worsening economic outlook. The BoE added that it will carry out a first of its kind stress test of vulnerabilities in non-bank financial markets next year. This follows the turmoil in September, when pension funds were on the brink of collapsing after the Truss administration’s fiscal agenda triggered a major cross-asset sell-off that exposed gaps in policymakers systemic risk analysis.
The State Secretariat for Economic Affairs, Switzerland’s agency in charge of producing forecasts for the government, lowered expected GDP growth for 2023 from 1.1% to 1%. That’s half the growth this year. In 2024, the economy should expand by 1.6%. Inflation in 2023 may ease to 2.2% vs 3% on average this year before dropping below the Swiss National Bank’s 2% target in 2024 (1.5%). The central bank holds its final policy meeting for the year on Thursday during which it’ll present its own forecasts. The jury is still out whether the SNB will lift rates by 75 bps or pare the pace to 50 bps, with the balance currently tilted towards the latter.