Markets
US Treasuries outperformed yesterday on benign November CPI numbers. The partial inflation report showed headline and core inflation slowing down to respectively 2.7% Y/Y and 2.6% Y/Y from 3%. It fits in our view that markets are underestimating the risk of continuation of the Fed’s normalization cycle in Q1 2026. The dollar temporarily lost ground but fought back in the end (close around EUR/USD 1.1725). US equity markets rebounded on the prospect of a more accommodative Fed’s stance with strong Micron earnings also putting aside AI valuation concerns. Decisions by the ECB and the BoE were as expected. The ECB raised its growth forecasts over the 2025-2028 horizon, but president Lagarde refused to give any forward guidance on interest rates sticking to the mantra that policy “is in a good place” instead. Interest rate stability is our base scenario for at least another 6 months. BoE governor Bailey flipped the vote from 5-4 in favour of unchanged in November to 5-4 in favour of a 25 bps rate cut (to 3.75%) yesterday. Three out of those five showed reservations against another rate cut on “auto pilot” early next year. They want more prove of either the disinflation process or a further weakening of the economy/labour market. The “hawkish” cut provided only temporarily relief for sterling with Gilts underperforming.
The Bank of Japan raised its policy rate by 25 bps to 0.75% this morning, the highest level since 1995. The central bank believes that the likelihood of realizing the baseline scenario that underlying CPI inflation will be at a level that is generally consistent with the 2% inflation target in the second half of the projection period (fiscal 2025-2027) has been rising. Looking forward, the BoJ thinks that it highly likely that the mechanism in which both wages and prices rise moderately will be maintained. Moves to pass on wage increases to selling prices continues, keeping underlying CPI on an upward trajectory. Simultaneously, uncertainties around the US economy and the impact of trade policies remain but they have declined. Real interest rates are expected to remain significantly negative and accommodative financial conditions will continue to firmly support economic activity. Therefore, if the outlook presented in October is realized, the BoJ will raise the policy rate further and adjust the degree of monetary accommodation. Japanese bonds underperform this morning because of the slightly hawkish guidance. Money market discount a next move at the July meeting, which would accord to the +- 6 month hiking pace in place since March2024 but interrupted during the trade war. Japanese yields add 2.2 bps (2-yr) to 4.8 bps (10-yr) with the 10-yr yield surpassing the 2% mark and reaching the highest level since 1999. The Japanese yen fails to profit against a slightly stronger overall dollar and in a positive risk environment (USD/JPY 156.35).
News & Views
• The Czech National Bank (CNB) unanimously decided to keep its policy rate unchanged at 3.5% yesterday. Even as inflation has held close to the 2% target over the previous two years, core inflation is assessed to remain elevated in the quarters ahead. This ongoing inflation pressures from the domestic economy currently rule out a further decrease in interest rates. The CNB still thinks that a relatively tight monetary policy compared to the past is needed as elevated credit growth is fostering a rise in the quantity of money in the economy. The labour market remains tight and wages are rising at an elevated pace. Household consumption is also increasing. Elevated services inflation and property price growth are having an inflationary effect. Despite this assessment, the CNB now sees the risks and the uncertainties for the fulfilment of the inflation target as “balanced overall”. In November this risk balance was labeled as “inflationary overall”. At the press conference, governor Michl saw an equal chance for a rate cut or a hike as the next step. He also indicated that policy won’t react to one-off changes in power prices which might push headline inflation below the 2% target next year. The Czech 2-y swap yield declined further to 3.66%.
The EU this morning reached an agreement for a loan of €90bn to Ukraine. The funding of the loan will come from joint debt issuance backed by the EU budget. In this respect, the EU moved away from the plan to use frozen Russian assets. According to EU leaders, Russian assets remain blocked. If Moscow later pays reparation loans to Ukraine, then Ukraine can use these funds to pay back the EU loan. The agreement also includes that the use of the EU budget won’t impact the financial obligations of Hungary, the Czech Republic and Slovakia, who were skeptical to provide financial support to Ukraine.
 has been rising.){kind=link}