Markets
FI, once again, is where most of the market attention went to today. It originated, once again, from Japan where a more than solid demand for a 30-yr JGB auction failed to prevent yields rising in maturities up to 20 year. A Reuters report that the Takaichi government is said to tolerate a BoJ rate hike this month added a little fuel to the fire. Such a move still isn’t fully discounted even though the stars are aligning. The market implied probability did rise from <60% on Friday to 80% in recent days on BoJ governor Ueda’s speech on Monday and further to 89% today. Japan’s 10-year yield hit the highest level since 2007 at 1.94%. The closely watched reference is now 6 bps away from the pre-GFC highs. The Japanese yield situation warrants close monitoring with higher local yields pulling back or keeping capital at home (reversing the long-popular carry trade). Less huge (foreign) buyer of particularly long term bonds – next to central banks and traditional buyers such as pension funds and life insurers – comes at a tricky time when huge supply (government deficits) is already competing for demand. JGBs reaffirmed their importance for global bond markets by dragging Bunds and Treasuries down with them. US yields today add between 2 and 3.5 bps. The front-to-middle segment underperforms marginally following a steep drop in US jobless claims. The 219k reading was the lowest since September 2022. The holiday-shortened week ending Nov 29 came with some Thanksgiving-related distortions that some say help explain the low reading. It won’t alter the Fed’s intentions for next week though. German yields add 0.5-2 bps across the curve. Bunds underperform vs swap with market chatter growing about a potential demise of Merz’ seven months old government. A group of Merz’ own CDU lawmakers rebelled against a pension bill. The 18 that did effectively exceed the CDU/SPD’s majority of 12. Should the group continue to do so in tomorrow’s final vote and the Left party does not abstains (as they said they would), the SPD co-leader Bas said earlier this week it could spell the end of the coalition. New elections according to the polls would favour the extremes, the far right in particular. It wouldn’t come at a worse time after French politics this week also rearing its head again when coalition partner Les Horizons said it wouldn’t support the social security budget bill in December 9’s vote. French OAT/swap spreads have been trending higher all week and trade back above Italy’s. The euro doesn’t want to frontrun any German or French political upheaval for now with EUR/USD holding steady around a 1.5 month high of 1.167 but it’s a tense situation. JPY outperforms, pushing USD/JPY back below 155 for a second time this week. EUR/JPY is also down on the day but remains near the record highs north of 180.
News & Views
Czech inflation unexpectedly fell by 0.3% M/M in November (+0.1% consensus), bringing the annual number down to 2.1% Y/Y instead of the expected stabilization at 2.5%. Gauges for core inflation slowed from 3.2%/3.3% Y/Y to 2.9%/3% Y/Y. Details showed steep drops in goods (-0.6% M/M and +0.6% Y/Y from 1.3%) and food prices (-0.8% M/M & +2.8% Y/Y from 3.9%). Within food subcategories, it were processed food, alcohol & tobacco prices that fell while unprocessed food prices still increased (+0.8% M/M & +1.9% Y/Y from 3.3%). Energy prices were 0.1% lower compared with October and 3.8% lower versus November of last year. Services inflation (+0.1% M/M) held steady at 4.6% Y/Y. The Czech Statistical Office also released Q3 wage data today. Nominal wages increased by 7.1% Y/Y (from +7.6% Y/Y in Q2) with real wage growth coming in at 4.5% Y/Y (from 5.1% Y/Y in Q2), almost matching expectations (+4.6%). The Czech koruna lost ground after inflation numbers with EUR/CZK rising from 24.10 to 24.22. CZK swap yields lose 7 to 9 bps across the curve in a slight bull steepening move.
The Bank of England’s Decision Maker Panel (DMP) survey showed stable price and wage growth metrics at firms in November. Year-ahead and three-year-ahead CPI inflation expectations were unchanged at 3.4% and 3% respectively. Realized annual own-price growth and realized annual wage growth remained steady as well, at 3.8% and 4.5%. Both year-ahead measures increased by 0.1pp compared with October to 3.7% and 3.8%. Employment is contracting with realized and year ahead employment growth falling by 0.7% and 0.2% respectively. The profit margin outlook is mixed, with equal shares expecting improvement or stability (both 38%) next year.
