Markets understandably started the week in a wait-and-see mode yesterday, looking ahead to key economic data including US CPI and policy meetings from the Fed, ECB and Bank of England later in the week. One-year inflation expectations in the New York Fed’s Survey of Consumer Expectations eased slightly from 3.57% to 3.36%, the lowest level since April 2021, but were unchanged for the 3-year (3.0%) and 5-year horizons.
The immediate impact on US bond trading was limited. US yields trended higher ahead of a $50 billion 3-year Treasury auction and a $37 billion 10-year note sale. Both auctions attracted only moderate investor interest. Nevertheless, yields eventually turned south after the auctions were over. US yields ranged from -1.3 bps (2y) to +2.3 bps (30y). German yields also moved less than 2 bps across the curve. Expectations of easier financial conditions continue to support equities.
The Dow and S&P 500 have now touched 2023 highs. The Nasdaq closed at a 2023 high. In the FX market, headlines/speculation on whether or not the BOJ will change its ultra-loose policy anytime soon continued to be a major driver of trading. According to Bloomberg comments, BOJ officials believe it is too early to leave the era of sub-zero interest rates. The USD/JPY rebounded to the mid-146 area throughout the day, closing at 146.18. Gains in the DXY index (closing at 104.1) were limited and technically insignificant. The EUR/USD was little changed at 1.0765. The Pound tested the EUR/GBP 0.8550 level, but didn’t make a sustained break.
Today, the focus will be on the release of the US CPI for November. Headline inflation is expected to be unchanged from the previous month, with the y/y rate edging down from 3.2% to 3.1%. The consensus is for core inflation to come in at 0.3% m/m and 4.0% y/y (vs. 0.2% and 4.0% m/m). We think it will take a big surprise in either direction to trigger a big/sustained market reaction ahead of tomorrow’s Fed decision.
In the meantime, we are watching to see if the bottom in yields that was established last week can become more solid. The latest inflation data will probably allow the Fed governors in the dots to remove a final rate hike. The question now is how much room they see for rate cuts in 2024. A maximum of 50 bps of expected rate cuts could help trigger some consolidation in the recent decline in yields. Such a scenario could also put a floor under the dollar. In Europe, we are looking to see if the ZEW German Investor Confidence could bring some good/less negative news.
This morning, the UK’s November labor market data printed on the soft side of expectations. Payrolls fell by 13k m/m and average weekly earnings slowed in October (7.2% vs. 8.0% expected overall vs. 7.7% expected; 7.3% vs. 7.8% expected ex bonus). The EUR/GBP is currently up about 10-15 ticks to trade around the 0.857 level.
