Markets
Bank of Japan governor Ueda finally embraced a next rate hike by the Bank of Japan, very likely when the central bank meets next on December 19. A 25 bps increase lifts the policy rate from the 0.5% in place since January to 0.75%. The market implied probability of such move increase from around 35% a week ago to currently 80%. Ueda highlighted that uncertainties surrounding US tariff policy and the US economy have significantly declined compared to a few months ago. Additionally, the yen’s recent weakness could accelerate inflation in Japan, potentially impacting corporations’ wage-and price-setting behavior and underlying inflation. Ueda compared raising rates at an appropriate level with taking the foot off the accelerator enough to achieve price growth and price stability rather than putting the breaks. He also warned that delaying the next rate hike for too long could cause sharp inflation and force the BoJ into (unwanted) rapid policy adjustments. Japanese markets reacted accordingly. JGB’s sold off with yields rising by 4.2 bps to 6.1 bps, the belly of the curve underperforming the wings. The Japanese 2-yr yield breached the 1% mark for the first time since 2008. The 10-yr yield (1.88%) also hit the highest level since that year with the 30-yr yield testing the 3.4% all-time high. The Japanese yen rises from the ashes after dismal performances in October and November. USD/JPY falls from 156.25 to 154.75. EUR/JPY falls from 181.10 to 108.25. Less bullish risk sentiment (-0.5% to -1% in Europe; -0.5% open in the US) and renewed weakness in crypto space (Bitcoin -6%) support the yen from the safe haven perspective.
The JGB sell-off spilled to core bonds markets in absence of relevant eco data. European and UK yield curves bear steepen. UK yields add 2 bps (2-yr) to 7 bps (30-yr) ending the very short relief rally after last week’s Budget presentation. German yields rise by 2.7 bps (2-yr) to 6 bps (30-yr) with EUR swap rates adding 2 to 5 bps in the similar steepening move. The EU 10y swap rate hits the highest level since July of last year (2.8%). The 30-y swap rate goes above 3.12% for the first time since November 2023. US Treausuries initially outperformed, but joined the sell-off as the US trading session got going. A new spike in the SOFR rate (4.12% on Friday from 4.05% on Wednesday; reported with one day delay) above the upper bound of the Fed funds target range added to general nervousness. End-of-month settings and lower liquidity in the Thanksgiving weekend are probably part of the explanation but the amount of liquidity banks pulled on the NY Fed’s standing repo facility already increased further today after the first of two daily operations. US T’s went from outperforming to underperforming, lifting US yields by 3.9 bps (2-yr) to 7.4 bps (30-yr) at the time of writing. The US dollar slightly underperformed today, but it’s hard to connect the dots. The move slowed as US yields started catching up. EUR/USD changes hands at 1.1630 from a start near 1.16.
News & Views
Polish Q3 GDP growth was slightly upwardly revised to 0.8% Q/Q and 3.8% Y/Y. Details showed consumption expenditure rising by 1% Q/Q (4.4% Y/Y). Household consumption eased slightly at -0.1% Q/Q after strong growth in the previous quarter (+1.5%). Government consumption rose 1.8% Q/Q and gross fixed capital formation added 3.5%. Exports increased (2.7%) slightly more than imports (2.4%). From a supply side point of view, industry added 1.6% Q/Q and 4.9% Y/Y. Added value in construction rose 0.6% Q/Q, transportation and storage 1.1% and accommodation and catering 0.8%. Despite decent economic growth since Q4 of last year, the National Bank of Poland (NBP) is expected to ease its policy rate further by 25 bps to 4% on Wednesday as November inflation eased back below the 2.5% NBP inflation target (2.4%). The zloty holds near the strong side of the 4.22/4.31 trading range.
Material shortages in the German manufacturing sector are worsening, according to the German IFO institute. German manufacturing is struggling with more and more bottlenecks in the supply of intermediate products. 11.2% of the companies surveyed reported difficulties in obtaining the materials they need for production (from 5.5% in October). Head of IFO Klaus Wohlrabe said that “the shortage of semiconductors is exacerbating the already difficult situation in the industry”. The shortage has become particularly acute in the automotive industry as more than one in four companies (27.6%) reported (from less than 1% in October). Manufacturers of electronic and optical products are also experiencing increasing problems (from 10.4 to 17.5%.). Idem for manufacturers of electrical equipment (16% reporting shortage up from 10%). In mechanical engineering, the figure rose to 8.2%.
