The Markets
Yesterday, the first November EMU inflation data from Germany and Spain came out in line with market momentum. Spanish HICP inflation fell 0.6% M/M, easing the y/y measure from 3.5% to 3.2% (3.7% expected). Core inflation also fell sharply (4.5% from 5.2%). Similar story in Germany as HICP inflation came in at -0.7% M/M and 2.3% Y/Y (from 3.0%). Technical factors and “erratic” base effects due to last year’s support measures are creating some noise and could lead to countermovements in the coming months. Either way, softer than expected is softer than expected.
German yields fell again between 8.2 bps (2y) and 4.6 bps (30y). Admittedly, much of the move took place before the data was released. The U.S. markets more or less copied the European trend, falling between 8.9 bps (2-y) and 6.5 bps (10-y). Comments from Fed Waller on Tuesday that the Fed is well positioned to slow the economy in a way that could also bring inflation back to 2.0% supported the case for bond bulls. Waller’s dovish stance was echoed by Mester and Barkin yesterday, although they didn’t formally rule out another rate hike.
US equities attempted to extend the rate-driven rally, but the gains could not be sustained. US indices closed little changed (S&P -0.09%). Soft EMU inflation data coupled with lower EMU yields prevented the EUR/USD from holding above 1.10 (close 1.097). At the same time, broader USD selling also eased (DXY closed at 102.76 after opening at 102.58). The Pound again outperformed the Euro, perhaps in part due to recent comments from BoE members warning markets against early rate cut bets (EUR/GBP close 0.8640).
Asian equity markets are mostly showing modest gains this morning. China’s November PMI’s disappointed again (composite 50.4 from 50.7), raising market hopes for additional policy support. US yields bounce back 1-2.5 bps across the curve, but don’t help the dollar (DXY 102.75, EUR/USD 1.0980, USD/JPY 146.95). Later today we will see the release of the flash EMU CPI for November.
After yesterday’s release, the risk seems to be for a result below consensus (-0.2% M/M and 3.9% Y/Y headline, 2.7% Y/Y core). It will be interesting to see if there is any further reaction in the interest rate markets or if we can see some consolidation heading into the ECB meeting on December 14th. In the US, October PCE deflators (core expected 0.2% M/M and 3.5% Y/Y) will be released, as well as jobless claims and the Chicago PMI. US markets may be more sensitive to weaker data. This could be the case for the dollar in particular. It will be interesting to see if the EUR/USD can regain the 1.10 level. USD/JPY also looks vulnerable below 147.
News and Views
The Bank of Korea unanimously decided to keep its key interest rate unchanged at the 15-year high reached in January (3.5%). The number of board members who see a possible need to raise rates further dropped from six to four. A slight change in the policy statement gives the central bank more room to maneuver in the future. The commitment to keep policy rates restrictive for “a considerable time” gave way to the guidance that it would remain restrictive for a long enough period to ensure that inflation converges to its target.
Nevertheless, the BoK slightly raised its inflation forecast for this year to 3.6% and for next year to 2.6% from 2.4%, following an unexpected acceleration in inflation in October. Governor Rhee still indicated that inflation will converge to the 2% target by late 2024 or early 2025. A board member who last month considered the possibility of a rate cut if geopolitics affected the economy no longer holds that view.
The Bank of Korea left this year’s growth forecast unchanged at 1.4%, while slightly lowering next year’s to 2.1%. The Korean won is holding near its strongest level against a weak USD since early August (USD/KRW 1291 area) this morning.
The Bank of Mexico released its latest quarterly inflation report. They expect a return to the 3% midpoint of the inflation target (+-1 ppt tolerance band) by early 2025, but inflation may prove a bit more sticky in the near term (core CPI: 5.3% vs. 5.1% for Q4 2023 and 3.3% vs. 3.1% for Q4 2024). Banxico also raised its GDP forecast for this year from 3% to 3.3% and for 2024 from 2.1% to 3%.
It sees growth of 1.5% in 2025. Governor Rodriguez Ceja said at the press conference afterwards that she saw a possibility for the start of discussions on a rate cut at the meetings next year. The central bank still has a policy rate of 11.25% since May, which makes real rates very positive. In November, they prepared a pivot by changing the forward guidance from stable rates for an extended period to stable rates for some time. MXN is losing ground this morning with USD/MXN rising from 17.14 to 17.28…
