The November yield correction found an easy way into the final month of the year via a disappointing US manufacturing ISM. The headline number stabilized at 46.7 instead of improving to the expected 47.8. New orders fell at a slower pace (48.3 vs. 45.5), while employment fell to 45.8. Actual production fell back below 50 after several months of expansion. However, prices paid rose to 49.9, possibly signaling that the strongest disinflationary pressures in the sector are easing.
In Powell’s expected speech a little later, the Fed Chairman warned against speculation about rate cuts. But an otherwise balanced tone was not nearly enough to change the market’s thinking, especially after Waller’s comments earlier last week. The Fed’s Goolsbee (“no evidence that we have stalled at 3% inflation“) and the ECB‘s Villeroy (“disinflation is even faster than expected”) all spoke in the same direction.
US yields hit a new correction low, with daily changes ranging from -10.6 (30-y) to -14.5 (5-y) bps. The 2yr yield (-14.2 bps) lost support at 4.60% (38.2% retracement of the 2023 yield rally). German yields followed their US counterparts lower with losses of 5.3 to 13.4 bps, with similar outperformance at the front end. EUR/USD erased much of the earlier accumulated losses, rebounding from a low of 1.0829 to close at 1.0884. Stocks rallied. The EuroStoxx50 (4418) closed above resistance at 4400 and surpassed the 2021 recovery high. The only remaining reference standing in the way of a return to the pre-GFC high of 4572.82 is the current year-to-date high of 4491.51. US indices gained 0.55% to 0.82%.
The S&P500 came close to testing the 2023 high (4607.07). Risk-on supported the GBP. EUR/GBP fell to 0.8564 after testing support at the 76.4% rebound in the GBP from the H2 decline (0.85576). The sharp drop in yields pushed the yen higher. USD/JPY closed at its lowest level since early September (146.82), while EUR/JPY lost the 160 level. Gold rose to 2072.22. The shiny metal hit a record high this morning, surging to 2135.39 in a move that looks like a stop-loss in a thin market.
It pared the gains to 2079.09, still above the pandemic high of 2075.47. Today’s economic calendar is razor thin. The ECB’s Lagarde appears at a conference today. She will address monetary policy in one last chance before the blackout period kicks in later this week. We don’t expect her to turn the markets around. US yields are bouncing back a few bps this morning (5.5 bps on the front end), but that’s just stabilizing at current levels. The dollar is looking to capitalize on the euro’s HICP-driven weakness and push the EUR/USD further south towards 1.0868. Support at 1.0862 (50% retracement of the October-November rally) may soon be breached, opening the next reference point at 1.0764. The pound’s technical picture has improved significantly over the past week, with the aforementioned resistance the only level standing in the way of a return to the yearly high (0.8492).
