Markets
The US/UK air strikes against Houthi targets in Yemen retaliating for shipping attacks in the Red Sea dominated media, but their market impact remained rather limited for now. The biggest move came on the oil market with Brent crude rising from $77/b before the first strikes to as high as $80.5/b. Traditional risk-related mechanisms weren’t at play. Correlation trades via distorted supply chains or potential inflationary effects neither. German Bunds gapped open higher but that was mainly catching up with US Treasuries’ performance yesterday. Failure to push the front end of the US yield curve higher after above-consensus CPI yesterday eventually triggered rebound action lower. The move accelerated with the front end of the curve outperforming following US December PPI figures. They fell by 0.1% M/M in December (vs +0.1% M/M expected) with core PPI flat (vs +0.2% M/M consensus). Both headline PPI (+1% Y/Y) and core PPI (+1.8% Y/Y) were lower than forecast. US yields lose up to 10 bps at the front end of the curve with the long end down <2 bps. German yields fall between 10 bps (2-yr) and 4.2 bps (30-yr). The new bond rally is quite surprising given that central bankers are pushing back against premature rate cuts by central banks and with inflation proving to be a little more sticky. EUR/USD fell from the 1.0980 area towards 1.0940 ahead of the PPI release. Afterwards, the pair returned again towards opening levels but a test of the psychologic 1.10 area doesn’t seem to be in the cards ahead of the US long weekend. The Japanese yen profits from core bond yields falling, erasing early losses on rumours that the BoJ in January will cut its inflation outlook for next year. Markets are closed on Monday for Martin Luther King Day. Stock markets initially doubted because of rising tensions in the Middle East but eventually got lifted by the bond rally. Key European indices gain up to 1%. US stock markets open less enthusiastic with 0.5% gains.
Next week’s eco calendar contains US retail sales and January Michigan consumer confidence. Key UK data are on tap with labour market figures and CPI inflation. The Q4 earnings seasons gets going with a lot of media attention going to the World Economic Forum in Davos. ECB Lagarde is one of the prominent guests and speakers. News & Views
Hungarian inflation retreated sharply in December, from 7.9% to 5.5% thanks to a monthly drop of 0.3%. Expectations were for a slower decline by -0.2% m/m to 5.9%. Electricity, gas and other fuels continued to depress price pressures, both y/y (-13.9%) and m/m (-1.1%). Food prices still rose 4.8% y/y but fell on a monthly basis (-0.1%). Core CPI extended its decline as well. A 0.3% m/m advance resulted in a y/y figure of 7.6%, down from 9.1%. For the whole of 2023, inflation amounted to 17.6% on average compared to 2022. The sharpest increase came on the account of food (25.9%). A price rise of 22.1% was recorded for electricity, gas and other fuels, 18.6% for other goods, including motor fuels and lubricants, 15.4% for alcoholic beverages and tobacco, 13.2% for services, 8.3% for clothing and footwear and 5.6% for consumer durables. Today’s outcome brings the real central bank policy rate further into positive territory (>5%), straining the economy much to the frustration of president Orban and economy minister Nagy. It increases risks for a bigger rate cut by the central bank when it meets January 30. The MNB already discussed the option to step up the pace in December from 75 bps to 100 bps before sticking to the former. Hungarian swap yields drop but it’s the long end that’s greatly outperforming. Changes vary between -6.7 bps (2-y) and -30.8 bps (20-y). The Hungarian forint temporarily dipped before trading unchanged on the day again around EUR/HUF 379.1.
Germany’s statistics office said many companies in the country slid into insolvency at the end of last year. The amount of insolvencies filed in rose by 12.3% in December compared to the same period a year before. The statistics office said they had been recording double digit growth rates in the number since June 2023 and expect the figures to continue to rise in coming months. A weak economy and high interest rates were mentioned as the key reasons.
