The recent downleg in core yields finally came to a standstill. Markets yesterday further reduced expectations both on the pace of Fed hiking and on the end-point of the rate cycle after US inflation eased further in December (albeit in line with expectations). There we no really high profile eco data today. A first estimate of German 2022 growth was reported at 1.9% Y/Y. Only 1.8% was expected, indicating that the slowdown in Q4 was likely less than feared. The ECB announced that banks repaid another € 62.8 bln of TLTRO loans. The amount was materially smaller than expectations for € 200+ bln of repayments. The repayment brings the outstanding amount of TLTRO loans below € 1.3 trillion. Alongside ECB rate hikes, the reduction of liquidity due to TLTRO repayments is a second channel to tighten financing conditions in the euro area. German 2 & 30 yields are little changed. The 10-y cedes 3.0 bps. US yields are ‘rebounding’ 1/2 bps across the curve. The US 2-y yield (4.17%) and 10-y yield (3.47%) are holding north of support levels at 4.13% and 3.4% respectively. Still it’s much too early to call the start of a genuine counter-move yet. Equities also shifted into a lower gear after recent, yield-driven rally. European indices gain marginally (Eurostoxx 50 + 0.2%). First Q4 earnings from major US banks failed to convince. US indices are ceding up to 0.75% immediately after the open. Oil extends this week’s gradual, but protracted rebound with Brent trading near $84 p/b compared to sub $80 levels recorded at the end of last week.
In FX, the dollar is looking for a bottom after the recent sell-off. The TW DXY trades near 102.55 after testing the 102 big figure early in Europe. EUR/USD (1.0795) also returns most of yesterday’s break beyond 1.0787. The yen still outperforms the dollar. At 128.2, the USD/JPY cross rate recently dropped below several support levels. This morning, the BOJ again had to step in to buy bonds after the 10-y broke beyond the 0.50% barrier. Even so, both the price action in the bond market and the FX market suggests that markets pondering further changes in the BOJ policy framework maybe already at next week’s policy meeting. EUR/GBP (0.887) failed to surpass the 0.89 big figure. UK production data were unconvincing, but services activity apparently held up better with the monthly GDP indicator for November printing in positive territory (+0.1%).
Hungarian December inflation jumped 1.9% m/m to be up 24.5% Y/Y. That was less than expected (3% and 25.8% resp.). Slowing food price increases (2% m/m, lowest in 2022) and tanking gas prices (11.8% m/m) partially offset a meteoric rise in fuel prices (+24.4% m/m) following the price cap removal early December. Tradeable goods inflation also eased but market services inflation remains elevated. KBC Economics expects inflation to peak early 2023 to 25-25.5%. The forint appreciates marginally against the euro (EUR/HUF near 396). The forint is key in assessing NBH monetary policy. In the current, relatively optimistic market mood vis-à-vis the forint, KBC Economics expects the MNB to start cutting the 18% O/N deposit rate end of February at the earliest before closing the gap with the regular base rate (13%) in June. This timing may shift to the future should sentiment deteriorate again.
December inflation in Sweden rose from 11.5% to 12.3% on a 2.1% m/m increase. Using a fixed interest rate, headline inflation also entered double digit territory (10.2% from 9.5%) while the Riksbank’s preferred core gauge (ex. energy) accelerated from 8% to 8.4%. All of the readings, both m/m and y/y, topped estimates, including those from the central bank. It all but cements expectations for a 50 bps rate hike at the February 9 meeting – the first one under governor Erik Thedeen – with a 50% chance discounted for 75 bps. The Riksbank lifted policy rates last year by a cumulative 250 bps. At the last meeting in November, it projected a terminal rate of 3%. But today’s data may have rendered this forecast outdated. The Swedish swap yield curve inversion deepens with yields rising 5.7-6.4 bps at the front end. The Swedish krone is unable to profit against a euro that also has some interest rate support due in coming months. EUR/SEK stabilizes near recent highs around 11.28.