Markets
The EU economy avoided a recession in 2023H2 (0.0% q/q growth in Q4) thanks to southern Europe while inflation readings from Spain (and Belgium) showed price pressures reaccelerating. The latter pushed euro area yields higher, with changes in Germany amounting to 2.6-3.8 bps across the curve. Consumer confidence in the US (Conference Board), meanwhile, rose to the highest since December 2021 (114.8) thanks to a sharp improvement in the current assessment (best since the pandemic hit). Job openings in the country unexpectedly picked up again from 8925k to 9026k for a third month straight in December. The quits rate, which indicates confidence in finding a new job after quitting one, stabilized around pre-pandemic highs. Yesterday’s numbers triggered a US yield spike but it was a long shot given the looming Fed policy meeting. The US curve eventually flattened with the front adding 1.5 bps still but longer maturities shedding up to 6.3 bps (30-y). Bourses finished with gains in Europe and mixed in the US. EUR/USD ended an uninspired session a fraction higher at 1.0845. Sterling ahead of the BoE meeting and in a technical setback after nearing the lower bound of the May sideways EUR/GBP trading range lost ground. EUR/GBP rose to 0.854.
A jampacked eco calendar kicked off this morning in China where PMI business confidence creeped a little higher to 50.9 (composite). The minutes of last week’s BoJ meeting revealed rising internal pressure to exit the sub-zero rate environment with one policymaker arguing the central bank risks missing the window of opportunity. GJGB’s lose ground this morning. The yen trades flat. Sticking to central banks, the Fed meets later today. The policy rate will remain untouched. Powell’s pushback against current (in our view too aggressive) market pricing will be critical. The risk is he doesn’t want to sound too hawkish since inflation does ease, creating room for rate cuts at some point in time. That, however, could trigger a bond rally and ease financial conditions further before the Fed even started doing so. The latest meeting minutes flagged the debate about tapering QT (currently $95b/month) has begun. Powell could use that theme as a lightning rod. Discussing and deciding over QT first buys the central bank some time before moving on to rate cuts. If successful and markets do pare some of the excessive bets, we may see a modest yield advance. If US data later this week (payrolls, ISM) underscore the message, there is potential for something larger. The US dollar should appreciate in line with rising US yields, especially against an ailing euro. Inflation figures from Germany and France following the Spanish example could limit the damage for EUR but nothing more.
News & Views
Australian inflation slowed more than expected, from 1.2% Q/Q in Q3 2023 to 0.6% Q/Q in Q4 (vs 0.8% consensus and 0.9% RBA estimate). It was the smallest quarterly rise since Q1 2021. Y/Y inflation fell from 5.4% to 4.1% (vs 4.3% expected) which is the slowest pace since Q4 2021. Underlying details show that housing (+1.5% Q/Q for new dwellings) remains one of the more sticky inflation components, driven by high labour and material costs. It’s a trend seen in other nations as well. The increase in rental prices (+0.9% Q/Q) would have been even higher if it weren’t for changes to rent assistance (+2.2%). Underlying inflation measures slowed slightly more than hoped as well. The annual trimmed mean rose by 0.8% Q/Q and by 4.2% Y/Y. Today’s inflation figures suggest that the RBA at next week’s meeting could pivot away from its hawkish guidance to a more neutral stance preparing the road for rate cuts. The RBA will have the backing of new growth and inflation forecasts. The Aussie dollar underperforms this morning with AUD/USD trading at 0.6560 (YTD low at 0.6526). AUD swap rates drop up to 18 bps for the 3-yr.
The German Council of Economic Experts yesterday published some possible proposals to changing the country’s debt brake. The constitutional rule limits Germany’s structural deficit to 0.35% of GDP since 2016. It was suspended during the Covid-pandemic and after Russia’s invasion in Ukraine. The GCEE finds the rule more rigid than necessary currently, restricting fiscal space for future-oriented expenditure. One proposal would be a softer transition period after periods of suspension. Another would tie the structural deficit to certain debt-to-GDP threshold, allowing a higher structural deficit when debt is low. The debt brake came back into focus after Germany’s constitutional court last year slammed off-budget vehicles to circumvent it. Any changes to the rule would require a 2/3rd majority in German parliament with the liberal FDP and the CDU opposing any changes for the moment.
 market pricing will be critical. The risk is he doesn’t want to sound too hawkish since inflation does ease, creating room for rate cuts at some point in time. That, however, could trigger a bond rally and ease financial conditions further before the Fed even started doing so. The latest meeting minutes flagged the debate about tapering QT (currently $95b/month) has begun.){kind=link}