Markets
ECB Lagarde addressed a German finance ministry event just before yesterday’s European close. While her quote that the ECB is “not done” in its inflation fight drew most (headline) attention, markets focused on – and reacted to – other comments. Mainly that the central bank switched to a phase in the cycle which president Lagarde would characterize as being attentive and focused, allowing some time to see how fast disinflationary forces take effect. Markets interpret the ECB’s first pause since the rate hike cycle started in July 2022 as final, banking on rate cuts as soon as Q2 2024 in a goldilocks soft landing scenario where central banks can eventually shift their focus to supporting growth again from fighting inflation. Anything short of backing more imminent rate hikes is currently interpreted as lower (policy) rates being the next move. German yields closed up to 5 bps lower at the 5-yr tenor yesterday. The single currency faced a setback with EUR/USD closing at 1.0911 from 1.0940 following a failed test of 1.0960 resistance (62% retracement on mid-July to early October decline). EUR/GBP copied the move south in EUR/USD with the pair ending just above 0.87 from 0.8750. Lagarde warned however about the path forward for the two main forces pushing inflation down today. The impact of the unwinding of the energy and supply shocks – accountable for two-thirds of the inflation surge – is fading while there is some uncertainty about the strength of the impact of the current restrictive monetary policy on growth. Therefore, headline inflation is set to rise again slightly in the coming months, mainly owing to base effects (aforementioned energy but also reversal of fiscal support measures). Minutes of the early November Fed meeting showed broad unanimity on decisions taken. The US central bank needs to proceed carefully, watching data in coming months. The release didn’t trigger any market reaction. Daily changes on the US yield curve ranged between -2.3 bps and -4 bps yesterday. The rally on European and US equity markets ended with a day of minor losses (-0.5%). Consensus-beating earnings by Nvidia and the Gaza hostage/prisoner swap deal do little to improve risk sentiment this morning. The eco calendar is thin today with only weekly jobless claims and durable goods orders. We don’t expect big swings ahead of the US long weekend (Thanksgiving) suggesting recent corrective tops (bonds/stocks) and bottoms (dollar) to stay out of reach.
News headlines
The Hungarian central bank cut the base rate yesterday by 75 bps to 11.5%. A close advisor to the rate-setting committee last week followed by vice-governor Virag a day later strongly hinted at this to happen. Doing so quashed speculation that the MNB would speed up the cutting pace following disinflation stronger than markets expected. CPI in October stood at 9.9% while core inflation rose by 10.9%, both being in the lower half of the range provided in the MNB September report. The three-month annualized change in core inflation fell below 3%, from 4% in September. Inflation is expected to decrease further all the way to 2.5-3.5% in 2025. The MNB added that a positive real interest rate supports the process, revealing a preference to keep this the case as it further normalizes the tight monetary policy stance. Growth forecasts were left unchanged compared to September with GDP seen expanding at a 3-4% rate in 2024 and 2025. The economy this year is expected in the lower half of the -0.5-0.5% September range. The Hungarian forint lost territory but was no exception in the region. At a close EUR/HUF 381.05, the currency trades close around recent highs though below YtD highs of 370.
The Bank of Japan may say on the record that it does not want to exit its ultra-easy policy stance, its actions increasingly suggest otherwise. Data up to November 21 show that the central bank hasn’t bought any real estate investment trusts (J-REIT) this year. In addition, it has bought exchange-traded funds at only three occasions in 2023 so far. The BoJ has accumulated these risk assets on a large scale since 2010 to complement its easing stance. Both are now growing robustly on themselves, offering a perfect opportunity for the central bank to step back. Also, the BoJ in its updated quarterly plan cut the minimum amounts of bonds it will buy across all maturities. The biggest reductions take place in the 5-10y bucket and maturities over 25 years. This follows actual buying in the previous quarter which was already lower than the pre-announced minima. It triggered a corresponding curve underperformance. Japanese yields this morning rise 3-6 bps in the 10-30y bucket.
