Markets
Core bond yields rallied in the run-up to the weekend. In doing so they even eked out a net weekly gain. Friday’s move higher was inspired by central bank members, not least Fed’s Powell and ECB’s Lagarde, leaning against the dovish market pivot. Another unexpected rise in consumer inflation expectations weighed additionally on the front end of the US curve. The one-year ahead gauge rose from 4.2% to 4.4% while the long-term indicator (5-10 yr at 3.2%) over the past 26 years was never higher but for two months in 2008 (3.4%). Yields in the country added 4.2-5.1 bps at the front and rose up to 2.7 bps at longer maturities. The 10-y yield moved further north of the 4.5% support level. Yields in German gained between 4.6-7.8 bps with some belly underperformance. Wall Street extended opening gains to 1.15-2.05% with bullish breaks in all three major indices. Risk-on supported the likes of oil (Brent bounced off the $80/b support) as well as the euro. EUR/USD strengthened from 1.067 towards but below 1.07. Poor UK GDP details caused EUR/GBP to test the October high but sterling prevented a break lower. The pair did close above the 50% EUR/GBP recovery of the 2023 decline around 0.8735. EUR/JPY hit a new 15-year high just shy of 162. USD/JPY was still an inch away from its previous YtD high (151.72) but powers through this morning. At 151.79 it is closing in on the 2022 intraday high of 151.95. If smashed, it brings about a technical graveyard for JPY with the next support only emerging at around 160. Asian news flow is thin but Moody’s downgrading the US outlook from stable to negative (with unchanged AAA rating) grabs some attention. Moody’s said risks to fiscal strength have increased and might no longer be offset by the countries credit strengths. Fiscal deficits are expected to remain very large while continued political polarization in Congress raised the risk that governments won’t be able to reach consensus on plans to slow the decline in debt affordability. Absent of significant measures, Moody’s expects the US government to run wide fiscal deficits of around 6% of GDP near term and around 8% by 2033, due to higher interest rate payments and aging related spending. Deficits averaged around 3.5% over the 2015-2019 period. They will raise the debt burden to around 120% of GDP by 2033 from 96% in 2022.
The new week kicks off very quietly, paving the way for some technically inspired trading without a clear direction. A few central bank speeches are worth following up, but fade to nothing compared to the avalanche that is due all week. Economic data include US CPI tomorrow and retail sales on Wednesday. The UK continues last week’s economic update with the labour market report tomorrow, inflation numbers on Wednesday and retail sales to end the week. We hold on to our expectations for a topside break in EUR/GBP.
News & Views
According the people familiar with the matter mentioned by Bloomberg, UK Chancellor of the Exchequer is set to extend major tax breaks for UK businesses in its upcoming fiscal plan as he aims to support investment and revive the UK economic growth. In concreto, Hunt is said to consider prolonging the ‘full expensing policy’ which gives UK companies 100% tax relief for capital spending beyond current expiration of the measure in the fiscal year 2025/26. According to people with knowledge of the measure, the measure would cost the Treasury about £10 bln per each year it is extended.
Rating agency Fitch on Friday affirmed Italy’s BBB rating with a stable outlook. In its assessment, Fitch expects the country’s public debt-to-GDP ratio to stabilize over its forecast horizon near the levels of 2022. It also expects the country’s growth to receive moderate support from the pick-up in the execution of EU-funded projects. Ongoing broad stability in the government coalition is seen limiting more marked policy risk. Even so, a significant loosing of the fiscal targets has weakened the deficit path. The rating agency also sees associated risks of higher yields on new debt issuance and non-compliance with EU fiscal rules. Later this week, rating agency Moody’s is expected to update its assessment of the Italian credit rating. Moody’s has a Baa3 rating for the country with a negative outlook.
