ING Economics

Rates Spark: We still like the fade here For players that are over-fixed, or feel they’ve missed the boat on receiving higher rates, consider some swap to floating strategies between here and 4.5% on the 10yr Treasury yield (or approximately 4.25% on 10yr SOFR). Fade the upside to yields ahead, or just average in from here with fixed rate receivers.   US 10yr tamed on touching 4.33%, but not a clear-cut buy just yet The initial reaction to the 0.4% US core consumer price inflation surprise for January was spot on. The 10yr Treasury yield gapped away from 4.15%, to north of 4.25%. It’s tamed a tad since, having tapped out on kissing 4.33% (a key technical level). It may well be that that is the top for this week, as Thursday likely sees a tame theme from retail sales and industrial production, and then we’re into a Friday that will feature sub-2% producer price inflation and confirmation of sub-3% inflation expectations. The question for subsequent days and the coming week is whether the trend lower in yields has legs beyond the pullback from the highs hit at 4.33%. To rationalise that, there would need to be a re-build in the rate-cut expectation narrative. So far in 2024, that rate cut narrative has been battered by a selection of events. These include, more recently, a 353k non-far payrolls outcome, the afore-mentioned 0.4% month-on-month on core inflation, and things like the nudge up on consumer confidence see a few weeks back. And a big issuance remainder, one that may have topped, but remains heavy for the foreseeable. These have not gone away. They have been interlaced by survey evidence pointing to pockets of weakness, and we do believe there is a material slowdown brewing, but the big hitting data is still not where it needs to be to make an imminent rate cut a no brainer. Even though it was fully priced for March, it was never a no-brainer. And as that got priced out, market yields re-traced higher. This process can’t continue in a relentless fashion, as enough pricing out of cuts has likely taken place already. But at the same time, there needs to be a catalyst in the other direction, where market rates can not just nudge lower, but gap lower. That requires a reversal of the items mentioned here. So, say, from the likes of the next CPI report (a month away) or the next payrolls report (3 weeks away). In the meantime, the issuance pressure won’t slow. So, the bond bulls do need something to happen. We continue to advocate using the space between 4.25% and 4.5% on the 10yr Treasury yield as an opportunity to fade in some longs. We’ve been tactically short since the beginning of the year till we hit the highs on Tuesday. We remain of the view that there is still a residual resilient upside left for market rates. We’re threading the needle here though, as we do expect to see rate cuts by the summer. So, fade the upside to yields ahead, or just average in from here with receivers.

Economic recovery comes to an abrupt halt in Hungary High-frequency data already suggested that economic activity in the fourth quarter wouldn't be too good, although we had hoped for a reprieve. However, the reality has become harsher, and that doesn't bode well for 2024 outlook. Hungarian GDP growth in the fourth quarter of last year came in at 0.0% year-on-year (YoY) as a result of a stagnant quarterly growth rate. This is well below market consensus and much worse than ING's. However, the seasonally and calendar-adjusted data is somewhat higher, as GDP growth in Q4 was 0.4% higher than in the same quarter of the previous year. This difference between the raw and adjusted data can be explained mainly by calendar effects, as seen in the case of the latest industrial production data for December. The 2023 time series is yet again prone to revisions Nevertheless, the short-term momentum, as indicated by the 0% quarter-on-quarter (QoQ) growth figure, looks disappointing. What's more, the Hungarian Central Statistical Office noted that there is a lot of uncertainty regarding the effectiveness of estimation methods and seasonality, which may have a greater impact on the size of revisions than usual. In this regard, the entire 2023 GDP time series was revised, confirming that Hungary was indeed in a four-quarter technical recession previously. We bring this up because, after the release of the Q3 GDP data, the Q2 growth rate was revised to 0%, meaning that the technical recession officially lasted only three quarters, followed by a flat quarterly growth rate. Now, with the latest Q4 GDP data, it appears that Q2 has been revised again (to -0.1%), confirming our view that the economy was indeed in a technical recession for four quarters. In this regard, the technical recession ended in the third quarter with a one-off - mainly agricultural - boost, only to be followed by an abysmal performance in the fourth quarter   Hungarian GDP growth   This is only the first estimate from the Statistical Office, which means that it has provided few details on the growth structure. But what we've got is in line with our expectations. Some parts of the services sector and agriculture contributed to growth, while industry, construction and retail services were significant drags on the economy. The reason why agriculture made a positive contribution in 4Q23 is that last year's base was very low due to a very bad agricultural year in 2022. This, combined with better-than-expected weather conditions, resulted in an overall good agricultural year, which means that agriculture was a tailwind for growth this time. However, it’s hardly surprising that construction was a drag on growth in a double-digit interest rate environment, combined with a lack of EU funding in 2023.   Industry has been a drag on growth, and the outlook is no brighter As far as industry is concerned, we said in our last article that industry may have been a drag on growth in the fourth quarter, as output deteriorated sharply in November and December. It seems that once inventories have been replenished, the industry as a whole simply lacks further demand impulses. This is a problem because, although domestic demand is gradually recovering, the lack of external demand is a real problem. Our biggest trading partner, Germany, hasn't been in good shape recently, clouding the outlook for industrial production. Such a weak ending in 2023 might explain why the government is pushing so hard for pro-growth measures and an upward revision of this year’s deficit target from 2.9% to 4.5% of GDP. In this regard, the idea of changing the reference rate for new corporate loans (case closed with a compromise) served the sole purpose of stimulating lending activity and, thus, economic growth. In addition, a total of around HUF910bn in EU funding is expected to be announced in the coming months under the Operational Programme for Economic Development and Innovation Plus. In the area of business development, the budget is HUF 450bn, most of which is loan-based funding at 0% interest. The otherHUF 460bn envelope largely covers non-repayable grants with the aim of increasing labour market activity   Carry-over effect is weaker than expected So, 2023 was a recessionary year, as GDP fell by 0.8% for the year as a whole, according to seasonally and calendar-adjusted data. However, this is weaker than both what we and the market consensus expected. With this weak fourth-quarter performance, the so-called carry-over effect in 2024 will also be much weaker than expected, which, based on our calculation, is around 0.4%. In other words, with a full year of stagnation, annual economic growth in 2024 would be around 0.4%. However, with a good end of the year, it could have been double or even triple that. All this means that the government's 4% economic growth forecast would require very strong quarterly growth rates during 2024, as the base would help very little. However, even ING's more pessimistic GDP growth forecast of 3% is under threat, given the economic performance at the end of last year, so we see clear downside risks to the growth outlook. As a final note, we will write our final assessment after the Statistical Office publishes the details of the structure of growth on March 5th.

The Netherlands exits its shallow recession The Dutch economy expanded in the fourth quarter of 2023, and the technical recession in the Netherlands has now come to an end. GDP grew 0.3% quarter-on-quarter, in line with forecasts. The expansion was driven by private consumption, while public consumption and exports also saw improvements.   Purchasing consumer as the driving force Household consumption expanded significantly (+1.8% QoQ seasonally adjusted) after three quarters of decline, on the back of a high contractual wage increase of 6.9% year-on-year. It provided by far the largest contribution of 0.8ppt to GDP growth in the fourth quarter. Dutch households purchased more domestically and abroad, contributing to the increase in imports. There were more purchases of durable goods and especially of services within the Netherlands, while growth in domestic consumption of food and beverages stagnated.  Government consumption rose as well, albeit at a slower pace (0.4%) than in previous quarters. Employment also increased, especially in public administration and education. Like private consumption, Dutch international trade also showed the first signs of a turnaround. It expanded mildly after three contractionary quarters, but the net contribution of the trade balance (exports minus imports) to the GDP was close to zero due to a similar increase in imports. The positive trade developments were only visible in goods trade, as service exports and imports contracted. Foreign consumers bought more in the Netherlands, contributing to a rise in exports in the fourth quarter. As expected, investment contracted for the second quarter in a row, falling by a significant 2.1% compared to the third quarter. There were fewer purchases of transport equipment, but the contraction was more broad-based and investment in machinery, software, housing and commercial buildings also contracted. Only investment in ICT equipment and research and development (R&D) rose. Because businesses still considered inventories as “too large”, an inventory reduction also put a drag on total investment growth and thereby on GDP growth. This also included a reduction in the storage of gas. Looking forward, we expect this investment to contract further during 2024, as higher financing costs will have a delayed negative effect on the cost of capacity expansion.   Signs of growth finally emerge for manufacturing Among Dutch industries, especially within recreation and culture, agriculture, fishery and manufacturing all expanded. The return of growth in manufacturing is significant since it follows five contractionary quarters caused by high energy prices and weak global trade. The semi-public sector (government, education and health), real estate and business services also improved. Not all was positive, though; mining and quarrying (i.e., oil and gas, related to the closure of the Groningen gas field), the energy supply sector, water and waste, financial services and construction all showed a contraction of value added. Looking at subsectors within manufacturing, the picture is still very mixed as well. Sectors producing investment goods, such as machinery, electronics, and transport equipment, remained in contraction territory.     Outlook of continuing nonbuoyant growth for 2024 The outturn for the fourth quarter of 2023 was very much in line with our forecast of 0.2%, both quantitatively and in terms of underlying drivers. As a result, the outcome will not change our view on developments in 2024. Because of revisions in previous quarters and statistical carry-over effects, it looks like the Dutch economy is heading for around 1% growth in 2024. This is still below the long-term growth potential. While investment will remain a drag, the main growth driver will be consumption. This includes public consumption, despite the fact that a new government hasn't yet been formed yet following the November 2023 parliamentary elections, as aging and policy paths initiated by the previous government are still causing higher spending

Year-end optimism for the Polish economy is set to continue in 2024 Poland’s GDP posted the second consecutive annual growth figure for the fourth quarter of 2023, and the second half of the year was notably better than the first. While reticent consumers and poor external demand weighed on activity in late 2023, prospects for 2024 remain positive and we forecast 3% economic growth on the back of a consumption revival.   Polish GDP grew by 1.0% year-on-year in the fourth quarter of 2023 following an increase of 0.5% YoY in the previous quarter, according to preliminary estimates from the StatOffice. Seasonally adjusted data suggests that the pace of recovery faded to 0.0% quarter-on-quarter from 1.1% QoQ in the third quarter. Household consumption most likely came to a halt, while global manufacturing conditions deteriorated in late 2023 and also negatively impacted the country.   Poland's GDP expanded in 2H23 after shrinking in 1H23 GDP, %YoY   Today's flash reading confirms that the economy remains on the path of recovery, albeit at a slightly slower pace than previously expected. While we do not know the detailed data for the fourth quarter of 2023, we estimate that it saw a deceleration in household consumption growth to around zero in YoY terms on the basis of annual data published earlier. This was accompanied by a continuation of solid fixed investment growth (around 7.6% YoY), a positive contribution to growth from net exports and a negative contribution of the change in inventories. The weaker consumption outturn in the final quarter of last year might was related to concerns of a renewed rise in inflation over the second half of this year and the building of precautionary savings. Prices are not rising as quickly as they were previously, but their levels are elevated and many households are cautious in spending. Soft consumption could also be a consequence of increased household investment in real estate due to the end of a government programme offering subsidised interest rates on mortgages, which expired at the end of 2023. We remain optimistic about economic growth in 2024, and project a rebound to 3%. This is supported by a dynamic increase in real disposable income associated with lower inflation, a rise in nominal wages (a large hike in the minimum wage, and a 20-30% rise in public administration), as well as an increase in social benefits (valorisation of child benefits, so-called "granny payments"). As a result, we maintain our earlier forecast that consumption will be the main driver of GDP growth in 2024. The main risk to the economic outlook is underperformance of German economy, which, combined with the strong PLN and stronger price competition from Asian manufacturers, may translate into a deterioration of the foreign trade balance. At the same time, however, there are some signs of global industrial recovery at the beginning of 2024. This could support the performance of Poland’s manufacturing sector. Full data for the fourth quarter of last year, together with the structure of GDP growth, will be released on 29 February.

Why covered bond spreads are not always stubbornly stable Even covered bonds occasionally see notable swings in credit spreads. So, let’s point out some of the important metrics against the recent backdrop of spread volatility seen in the covered bonds from a major German issuer.   It has not even been a year since the European Central Bank fully pulled its purchase support for the covered bond market, or the market was shaken up by a new challenge story. Last week, the covered bond spread levels of one of Germany's major covered bond issuers shot wider after the bank gave its second loan loss provisions guidance in four months for the unforeseen deterioration in its commercial real estate portfolio, particularly in the US. The subsequent almost 40bp spread widening in this bank’s covered bond spreads couldn’t contrast more sharply with the extraordinarily low and boringly stable spread developments of the covered bond market during the height of central bank support. Though a relatively isolated incident, it is a significant one for a bond product that has historically never experienced a single default event.   About covered bonds Covered bonds are generally seen as a low-risk bank bond product. Not only because of their systemic importance in Europe as a funding instrument for banks for housing market financing purposes but also because of the regulatory certainty offered to investors through strict legal frameworks for the issuance of covered bonds. The latter forms an important reason for the privileged regulatory treatment provided to covered bonds in Europe for risk weights, liquidity coverage ratio and central bank collateral purposes. Covered bonds are mostly issued under a dedicated legal framework. They are subject to special supervision ensuring that the legal requirements for covered bond issuance are always met. The bonds are dual recourse instruments offering investors a preferential claim to a collateral pool of high-quality assets if the issuing institution fails to meet its payment obligations to the covered bondholders. Even if this cover pool proves insufficient to meet all repayment obligations, the bondholders still have a claim on the remaining assets of the issuing bank, ranking pari-passu to ordinary unsecured debtholders. The assets included in the cover pool are subject to strict eligibility criteria and to regular monitoring and valuation provisions when the cover assets are mortgage loans. Commercial real estate assets for example, only count as eligible collateral up to a loan-to-value (LTV) ratio of 60%, while defaulted exposures would not count as cover assets at all. The actual LTV levels are often even lower than that, offering a decent cushion against real estate value declines in the event a property has to be sold to recover a loan. Finally, issuers must, by law, make sure that covered bonds are secured by sufficient collateral.   Refinancing risk concerns It is important to bear in mind that covered bonds are generally secured by residential and commercial real estate loans that have a longer maturity than the covered bonds themselves. This maturity mismatch between the assets and the liabilities exposes the holders of covered bonds to refinancing risks. If the issuing bank is no longer able to meet its payment obligations, the bondholders become fully reliant on the payments made on the underlying pool of mortgage loans for full and timely repayment. This exposes investors to the risk that, for timely payment, the assets from the cover pool might have to be sold at below-market-value fire sale prices. At the current higher interest rate levels, this would possibly add to the general market value declines of longer-term fixed-rate mortgage loans originated in the low-interest rate years. The alternative for a full or better recovery from the collateral pool would then be that investors wait longer for the mortgages to gradually be paid off over time. This has the consequential side effect that investors may not be able to reinvest these repayments at a time when interest rates and market circumstances are more favourable to do so. Several legal safeguards mitigate the refinancing risks related to these asset and liability maturity mismatches. Most covered bonds have soft bullet twelve-month extension features. Subject to strict conditions, the repayment on a covered bond can be postponed by twelve months if the issuer is not able to redeem the bond on its scheduled maturity date. This allows for extra time to sell mortgage assets to make the repayment without having to accept substantial ‘fire sale’ haircuts.   The majority of the covered bonds in Europe nowadays also benefit from a 180-day liquidity buffer requirement, obliging issuers to set aside sufficient liquid assets to cover their interest and redemption payments due over the next 180 days. The liquidity available for redemption payments may be dependent, however, on whether the national covered bond law requires banks to make such reservations with reference to the scheduled intended maturity date of the covered bond or with reference to its twelve-month extended final maturity date.    Cover pool quality concerns While very important, these refinancing risk mitigants do not address the possibility of a significant deterioration of the quality of the collateral pool. Cover pools might, for instance, be exposed to a more rapid performance deterioration if they have a higher borrower concentration or have more loans included in the pool that are up for nearer-term repayment or refinancing under more challenging conditions and at lower property values. A significant rise in non-performing loans or a notable increase in loan-to-value ratios due to property value declines could reduce the collateralisation levels protecting the covered bondholders. An important cushion against this risk is that covered bond regulations always require sufficient coverage by high-quality eligible cover assets. This means that non-performing loans must be replaced and/or would no longer count towards the coverage requirement. Smaller-size issuers that already pledged most of their eligible assets as collateral for covered bond issuance may have fewer options, though, to replace non-performing assets with other eligible performing assets. This might constrain the possibilities of the bank to refinance maturing covered bonds with new covered bonds and could force them towards the more expensive senior unsecured segment for stable funding purposes.   In summary Despite the solid regulatory protection features in place to secure covered bonds, these are factors that covered bond investors do become nervous about when they start feeling more uncertain about a bank. While not very common, they do explain why even covered bonds may occasionally see a notable swing in credit spreads. This article is an edited version of one we published for qualifying institutional investors on the ING Global Markets Research website (research.ing.com).

Caution advised on latest eurozone production figures Eurozone industrial production was up 2.6% Month-on-Month thanks to an apparent barnstorming performance from Ireland. But be careful! There's often a lot of volatility in Ireland's figures. Most big manufacturing themes see a downtrend in production although we are seeing some early signs of a recovery.   Eurozone industrial production saw a curious jump in December thanks to an increase in Irish production of 23.5%. Contract manufacturing and outsourcing have become dominant features of the Irish economy in the past decade, which has added to significant monthly volatility of production numbers. Therefore, it is debatable how much we should read into these numbers as this result gave us the strongest production level in the whole of last year.  Excluding Ireland, we estimate that production grew by 0.3% in the eurozone, still defying continued German weakness, where production declined by 1.2% in December. France and Italy experienced growth of 1.1%, and the Netherlands saw production improve by 6.6%. But while that is an encouraging note at the end of 2023, the overall trend for the eurozone excluding Ireland remained down. The inventory cycle gives little hope for an imminent production pickup, and supply chain problems related to the Red Sea are adding to struggles for the manufacturing sector. And while energy prices have developed favourably despite disruptions, price levels seem to remain unattractive for a rebound in production as global competitiveness is under pressure. Some green shoots are to be noted though. While the turnaround of manufacturing is a long process, surveys do indicate some first signs of improvement. The eurozone manufacturing PMI has cautiously been increasing – although it remains well below 50 – and businesses are getting slightly more upbeat about orders. That means that a bottoming out seems to be getting closer for the battered backbone of eurozone competitiveness.

Upside surprise in Romanian inflation complicates the easing cycle Romanian inflation exceeded expectations and rose to 7.4% in January due to broad-based price pressures. Strong services inflation and its influence on wages, coupled with higher growth than expected, may continue to keep the National Bank of Romania neutral over the months ahead. We maintain our 4.7% estimate for 2023's December inflation figure.   January price pressures increased significantly in month-on-month terms compared to the previous month, especially in the food and services categories. This was partially expected given the hike in excise duties for fuel, tobacco, alcohol and VAT for some sugary items, recreational activities and few other targeted items. Aside from what was implied by tax changes already, a few items saw particularly large increases. These include fruits and vegetables from the food section, as well as air fares, water distribution, rents, and postal services from the services section. Waters were somewhat calmer in the non-food section, where increases were slightly lower than we expected and upside pressures came mainly from fuels, as expected. Core inflation remained constant at 8.2%. Overall, this reading removes some of the important gains achieved at the end of last year on the inflation front and pushes the profile slightly higher in the short term. More specifically, getting back towards the December levels looks now more likely in April than in March. More broadly, it might show as well that firms were confident enough to pass on the increased costs into prices amid the tax hikes, acting early on the pick-up in retail sales from the fourth quarter and strong real wage growth which is expected to continue into 2024.   On the monetary policy front, today’s data doesn’t simplify the outlook. With both inflation and economic growth printing above expectations, chances of a delay in the National Bank of Romania's easing cycle have increased. We're sticking to May this year as the starting point for the easing cycle. On the other hand, we acknowledge our 5.50% terminal rate call for 2024 is probably too ambitious in an environment where real positive rates are targeted and the deposit facility is the relevant policy rate. Alongside that, we have the record-breaking interbank liquidity – which results in a policy easing outcome in itself – and the stronger-than-expected growth momentum confirmed by the GDP data. We revise upwards our terminal rate for this year to 6.00%. We maintain our year-end inflation estimate at 4.7%. For 2025, our view is that inflation will remain above the NBR’s target and settle slightly above 4.0%.  

Romanian economy picks up in 2023 Romania's fourth quarter GDP increased by 2.9% last year compared to the same period in 2022, despite contracting by 0.4% versus the previous quarter. Numbers exceeded the consensus estimates for the annual growth and likely leave many in wonder about the quarterly data. We maintain our estimate of 2.8% GDP growth for 2024.   As this is a flash release, we don’t have any other data except for the overall growth numbers. Details are to be published on 8 March. In annual terms, the gross numbers show that the economy accelerated in the last quarter of 2023, which is broadly in line with most of the hard-frequency data we have at hand. Indeed, the last months of 2023 saw a mild revival in consumption, as retail sales expanded by 2.1% in the last quarter. This translated also into a reversal of the timid improvements that were visible in trade balance throughout the year. At the same time, industrial production tempered its annual contraction, while construction activity remained robust, likely closing the year with a double-digit advance. After posting the large positive surprise in the third quarter, the agriculture sector is unlikely to have had a meaningful contribution again. We remain somewhat puzzled by the quarterly seasonally adjusted data which indicates a 0.4% contraction of the economy, and we believe that the number is likely to be revised upwards at the future prints. On this note, we continue to put more emphasis on the gross series, given the known mismatches between the gross and seasonally adjusted series.   What we make of it The 2.0% real GDP growth in 2023 is somewhat better than recent expectations, but well below potential and it confirms National Bank of Romania’s latest assessment of further contraction of excess aggregate demand. This will continue into 2024 for which we maintain our 2.8% GDP growth estimate, as the public investment engine is likely to get some help from private consumption as well. Monetary policy easing might help in the second half of the year, but in our view, the bigger issue is that GDP growth rates of 4.0-5.0% – that were business as usual just a short while ago – might become daring targets in the future.

CZK: Unfortunate timing for currency As with the Polish zloty, yesterday's surprise in US inflation data means another threat to the Czech koruna (CZK) as well. This comes after a sharp depreciation of more than 1% following the central bank's decision last week. EUR/CZK thus touched 25.40 yesterday, pushing record highs again. For now, the central bank seems more interested in medium-term than daily volatility, so we do not draw big conclusions here. However, we think tomorrow's inflation numbers will provide more reasons to price in more rate cuts, which could hit the CZK again. On the other hand, from a rates market perspective, we are approaching the point where all room for rate cuts will be fulfilled and the CZK will be driven more by core rates and differentials against the ECB. In the short term, we could see further weakness touching 25.50 EUR/CZK (despite our previously more optimistic CZK view) and EUR/CZK moving down later. The Czech National Bank still has plenty of time before the March meeting in six weeks, but even so, we will have to watch the CZK closely.

CEE: Fourth quarter shows improvement but still last year was disappointing Fourth quarter GDP numbers across the CEE region are being released this morning. In Romania, economic growth accelerated from 1.1% to 2.9% YoY. In Hungary, the numbers are also out and improved from -0.4% to 0.0% YoY, below market expectations. In Poland, figures will be released later, but we expect some acceleration here too from 0.5% to 1.0% YoY. This will complete the picture for the CEE region for the fourth quarter and the whole of last year – which was rather disappointing. The Czech Republic numbers were reported earlier with an improvement from -0.8% to -0.2% YoY, clearly the weakest economy in the region. For this year, we expect a strong recovery across the region of around 3%, with the exception of the Czech Republic where we expect just over 1%. Also released this morning was January inflation in Romania, which showed a rise in inflation from 6.6% to 7.4% YoY, highlighting the difference between the rest of the CEE region with lower headline inflation. This was also seen by the central bank, which left rates unchanged yesterday – catch up our latest NBR review in more detail. Yesterday's US CPI data was clearly negative news for FX in the CEE region, and we have seen significant weakness across the board as a result. PLN is showing the biggest losses, postponing our hopes of reaching the 4.30 EUR/PLN that we mentioned yesterday. The currency pair followed a spike in core rates, and PLN rates have had trouble catching up given the already elevated levels. The main driver today will be the reverberations in the core rates market. However, we believe that EUR/PLN will not go much higher from current levels and instead, the market will take advantage of weaker PLN levels to enter here.

FX Daily: Dollar set to hold gains through February Yesterday's strong US January CPI release clearly does not provide the Fed with the confidence it needs to start cutting rates. Instead of powering the next leg of the risk rally, the CPI data has applied the brakes and suggests the dollar largely holds onto its gains into the next big US price release – the January PCE data on 29 Februa.   USD: Setting up another good month for the dollar US January CPI figures have made uncomfortable reading for the Federal Reserve. A core inflation reading of 0.4% month-on-month and nearly 4% year-on-year is not a good look for a central bank preparing to cut rates. It is no surprise that the December 2024 Fed Funds futures contract sold off 24 ticks yesterday and the market has scaled back expectations for 2024 Fed easing to 90bp from a view of 160bp just three weeks ago. As our US economist James Knightley discusses here, the seeming divergence between the CPI numbers and the Fed's preferred measure of inflation – the core PCE readings – will only confuse the Fed. And clearly, these numbers are not giving the central bank the kind of confidence it needs to declare that the inflation battle is over. Add in the fact that January's US jobs data was strong across the board as well, which also brings into question the Fed's position that the US labour market is coming back into better balance. The strong inflation print generated a predictable market reaction – a bearish flattening of the US yield curve, weaker equities (especially growth stocks), and a stronger dollar. Looking across the FX space on a total return basis, the dollar is the strongest performer in the G10 this space this year and is only bettered (marginally) in the EM space by the Turkish Lira, Indian rupee, and Mexican peso. Given seasonal patterns favour the dollar in February and that the next big input into the Fed equation, the January PCE data, is not released until 29 February, it looks like the dollar will be able to hold recent gains for another couple of weeks. DXY can trade on the firm side of a 104.60-105.00 range today. Elsewhere, the broad-based dollar rally has taken USD/JPY well above 150. Because this is a dollar rather than a yen-led move, the consensus view is probably that Japanese authorities will not be able to justify any FX intervention. We are not so sure and suspect the US Treasury would again accept Japanese intervention to sell USD/JPY should it make a quick move to 152. At just 7.45%, one week USD/JPY implied volatility seems too low in that intervention cannot completely be ruled out.

Rates Spark: Bearish on bonds still, but the time for a fade is approaching US yields remain under upward pressure post CPI, but consider fading the move to come. The overall impact on euro rates remained relatively limited, resulting in wider Treasury-Bund spreads. That's a move that should be faded too in the weeks ahead.   US yields remain under upward pressure post CPI, but consider fading the move to come For players that are over-fixed, or feel they’ve missed the boat on receiving higher rates, consider some swap to floating strategies between here and 4.5% on the 10yr Treasury yield (or approximately 4.25% on 10yr SOFR). And here’s why. Tuesday’s US CPI report continues to reverberate through markets. The single standout number was the 0.4% increase in core prices for January. That's a month-on-month outcome; one that annualises to 6% inflation – clearly not what the Federal Reserve wants to see. It's also the highest month-on-month number for seven months, and reminiscent of the run of 0.4% and 0.5% outcomes that we saw for most months over the first half of 2023. Even if we were to regard this 0.4% number as a rogue reading, the 0.3% outcome that the market was expecting was not good enough either, as that would have annualised to 4.2% inflation. And we've had 0.3% MoM outcomes over the previous two months. Bottom line, core consumer price inflation is running with at least a 4% handle on a 3mth annualised basis, and the year-on-year rate of 3.9% is also too high for comfort. We can of course point to other measures of inflation that are running less hot, but it's the core CPI one that has tended to correlate best with 10yr Treasury yields when a long time frame is taken. It's far better than the headline number, and also better than the Fed's favoured measure (core PCE) that's now trending at closer to 2%. As much as we'd like to, we can't ignore core CPI. We can point to elevation in implied rents as an element that is frustratingly not doing (yet) what it should be doing (easing lower), but until it actually does Treasuries can't be comfortable. Just look at the absolute levels. The 10yr Treasury yield has just hit 4.3%. That implies a very low real yield to the year-on-year core CPI rate, and a large enough negative real yield to the annualized 3mth core CPI inflation rate. The previous run down to 3.8% for the 10yr yield was all about a mad expectation that the Fed was about to cut next month. Tuesday's number now brings even a May cut into question. Some weaker activity is due this week which can dampen the rise in yields, or even reverse them. But if so, it's likely to be only temporary. Given these inflation data, we'd have to have some very weak number to reverse this move in any meaningful way, at least not for now. The 4.25% to 4.5% range is the one that we have identified as a likely area for a turning point. Post this CPI report, it's now more likely for the turn to be closer to 4.5%. But we stick with the 4.25% to 4.5% range as one within which players should begin to fade into positions that begin to think about getting long the market. No rush on this as we can see yields rising some more first. But now's the time to at start to consider fading the up-move in yields.

Poland's external account close to balance in December Poland’s current account balance posted a tiny deficit in December, on surprisingly weak imports, following seven months of surpluses. The shrinking trade turnover reflects weak domestic and foreign demand.   Poland’s external current account balance posted a narrow deficit of €24m in December 2023, broadly in line with consensus assuming a surplus of €53m. Exports expressed in € declined by 6.0% year-on-year in December (our forecast: -6.2% YoY, consensus: -1.0%), deepening the 1.9% drop in November. Imports fell by 11.3% YoY (significantly below our forecast of -7.1% YoY, which was in line with consensus, following a 7.8% drop the month before). For 2023 as a whole, we estimate that the current account surplus amounted to 1.6% of GDP (up from 1.4% after November), and compared with a deficit of 2.4% of GDP in 2022. December saw a monthly deficit in merchandise trade for the first time in 2023 (€0.6bn vs. a surplus of €0.2bn in November). A solid positive balance in services (€3.2bn in December after €2.9bn the month before) offset the deficit in primary income (€2.7bn). The secondary income balance closed with a small surplus (€38m), though after eight months of deficits. The trade balance improved to 1.2% of GDP from 0.9% of GDP in the previous month (12-month rolling) and after a deficit of 3.7% of GDP a year earlier. Foreign trade data show a marked decline in turnover. As a net importer of energy and raw materials, Poland is benefiting from the extinction of last year's energy shock, primarily in the natural gas and coal markets. The decline in exports reflects weak demand in the euro area, particularly in Germany, which was straddling between recession and stagnation in the fourth quarter of 2023. In contrast, low imports growth is linked to weakness in domestic demand, particularly consumption and downward inventory adjustments. Soft indicators from the euro area (PMIs, today’s ZEW from Germany) suggest a slight, gradual improvement in exports prospects in the coming months. On the other hand, domestic data do not signal a rebound in imports. According to a National Bank of Poland communiqué, in December, declines in exports (expressed in PLN) were recorded in all six reported categories – the largest in supply, investment and consumer goods, and in the latter category particularly white goods. In transport equipment, sales of vans, road tractors and passenger cars increased, but exports of automotive parts fell. On the import side, fuel imports fell most sharply – linked to significant year-on-year price declines – but there were also large drops in intermediate goods, capital goods, and increase in imports of transport equipment was lower than in previous months. Today's data is neutral for the zloty, confirming Poland's generally solid external position. In recent weeks, the zloty has been supported by the increasingly less dovish monetary policy rhetoric (the statement suggesting flat rates until the end of this year) and the unlocking of the inflow of EU funds in 2024, including from the EU Recovery and Resilience Facility.   Current account and merchandise trade balances, % of GDP

National Bank of Romania review: On hold for a little longer As expected, the National Bank of Romania (NBR) kept its policy unchanged at 7.00%, underlining the lower-than-expected inflation which is bound to touch the 3.5% upper bound of the variation band of the target at end-2025. We are not exactly on the same page, but not far either.   In our preview we anticipated that some mild dovish hints will be put forward today. While they don’t necessarily stand out, we notice the NBR’s emphasis on the fact that annual inflation decreased faster than expected in the last quarter of 2023. This holds true for both headline and core inflation. The outlook for inflation is also looking marginally better, especially with January inflation (due to be published tomorrow 14 February) looking set to print “visibly lower than previously projected”. In the Bank’s latest forecast, headline inflation should reach the 3.5% upper bound of the variation band of the target at end-2025, hence the new medium-term forecasts are broadly in line with the previous ones. Our own estimates seem rather similar for this year, as the January inflation hump looks less scary than initially expected (we estimate it at 7.1%), while we maintain year-end inflation at 4.7%. Nevertheless, for 2025 our inflation profile looks rather flatish, as both core and headline inflation seem more likely to stabilise around 4.0% rather than dip into NBR's 1.5%-3.5% target range. When it comes to risks and uncertainties the wording hasn’t changed much, as the Bank continues to see “significant” risks stemming from the future budgetary stance, especially when it comes to public wage growth, pension hikes but also possible new fiscal measures that might be needed to keep the budget on track. As mentioned in our preview as well, another fiscal package, if adopted sometime this year, is likely to have a greater inflationary impact compared to the one adopted last autumn.   The new quarterly inflation report will be presented on 15 February, and this is traditionally a better moment to gauge the policy momentum within the NBR Board. We narrowly hold on to our view that rate cuts will start in May and that the key rate will reach 5.50% by the year-end, though we give a material probability for the rate-cutting cycle to start earlier (in April) and/or stop at a higher point (6.00%), given that the ultra-loose liquidity conditions are not likely to change throughout 2024, thus diminishing the need for conventional easing.   In the Romanian government bond (ROMGB) space, the Ministry of Finance has stepped into this year on the right footing with a decent issuance of ROMGBs covering roughly 13% of this year's plan, according to our calculations. That's roughly average in the CEE region, with some frontloading. On the other hand, if we look at the bid-to-cover of the January auctions, ROMGBs have the lowest result in the region, also thanks to the Ministry of Finance's open approach in the primary auctions. So the supply side is, in our view, under control for now but at the same time not dazzling like in Hungary, for example. On the demand side, we see rather neutral valuations for ROMGBs these days. The curve could probably see some steepening. However, we think that ROMGBs are at a disadvantage compared to CEE peers as inflation is still high (and even projected to pick up in January) while other central banks in the region are on the path to cut rates. Therefore, we are rather neutral on ROMGBs at the moment, pending better valuations.

Sticky US inflation reaffirms Fed caution on rate cuts US inflation failed to moderate as hoped with housing costs, air fares, medical care and recreation all keeping the run rate for month-on-month inflation hot. Their favoured measure of inflation, the core PCE deflator, may be cooling nicely, but the mixed messages means the Fed can't relax, with little inclination for imminent rate cuts.   Inflation remains stickier than thought US January CPI has come in on the high side of expectations with headline up 0.3% MoM versus the 0.2% consensus while core rose 0.4% MoM versus the 0.3% market expectations. This means the annual rate of headline inflation falls to 3.1% from 3.4% and core remains at 3.9%. The details show the upside surprise coming from shelter, which increased 0.6% MoM, led by owners' equivalent rent, which also increased 0.6%. Airline fares rose 1.4% MoM while medical care increased 0.5%, the same as recreation while education increased 0.4%. These last three are all the fastest rate of increase for a number of months. We did get good news on vehicle prices, which were flat on the month for new cars and down 3.4% for used vehicles, but the report is undeniably disappointing overall.   Mixed messaging: Core CPI versus core PCE deflator, MoM%, 3M annualised and YoY%   Fed remains wary of early rate cuts When looking at the core PCE deflator, which is tracking considerably lower as a measure of inflation, it again underscores the mixed messaging we are getting from the US data. The left-hand chart is core CPI from today, the right-hand chart is the Fed's favoured measure of core inflation, the core PCE deflator. What we want to see is the MoM% change (blue bars) to be below the black line (0.17% MoM) consistently to get inflation down to 2% year-on-year. We aren't close on CPI, but we are clearly there on the core PCE deflator. Likewise, the 3M annualised rate looks great on the PCE deflator and rather worrying on the CPI measure Nonetheless, today’s miss will embolden the Fed to signal it is in no hurry to cut interest rates with the market moving back to only fully pricing three 25bp rate cuts this year, the same as suggested by the Fed’s December dot plot of individual FOMC members with June the start point for cuts. That said, things can move fast and nothing is set in stone – it was only a few weeks ago that the market was pricing seven 25bp moves starting in March. Weak retail sales and industrial production numbers later this week may well contribute to a slight reversal in today's big market moves that have seen the US 10Y move back above 4.25%.  

German ZEW index increases in February There are still some pockets of optimism. The increase in Germany's ZEW economic sentiment index in February shows there is still light at the end of a very long tunnel. Financial analysts see light at the end of the tunnel, even though that tunnel seems to be never-ending. In February, the German ZEW index, which measures financial analysts’ assessment and expectations of economic and financial developments, increased for the seventh consecutive month to 19.9, from 15.2 in January. At the same time, the current assessment component weakened for the second month in a row, dropping to -81.7, the lowest level since the start of the pandemic, from -77.3 in January. It is the nature of the ZEW index that a weakening current assessment component almost automatically increases expectations. The further you fall, the easier it is to rebound at some point. Still, even though the ZEW index is definitely one of the worst-performing leading indicators in Germany when it comes to predicting GDP growth, it has a recent track record in predicting turning points. With this in mind, today’s numbers very tentatively signal better times ahead. At the same time, however, any cyclical improvement of the German economy will be too weak to offset structural weaknesses. Today’s ZEW index does little to change the base case scenario of yet another year of recession in Germany.

FX Daily: Lower US inflation can ignite real rate discussion We're expecting core US CPI inflation to be in line with the consensus of 0.3%, but our economists say it could be lower. If so, a declining real policy rate would be increasingly hard to justify should the American economy start to cool. Romania should keep rates unchanged, and PLN is heading for new gains.   USD: CPI test in focus A decent start of the week for bonds and European equities has helped Scandinavian currencies outperform amid a generally quiet start to the week as data calendars in key developed markets were empty yesterday, and some 'wait-and-see' approach ahead of today’s US CPI release.   Our economists expect a 0.3% MoM core CPI print today, in line with market expectations. US CPI has been recording faster monthly rises than the PCE (preferred by the Fed as an inflation measure), primarily due to the higher weighting of housing and vehicles in the basket. While rents are decelerating, the structure of the CPI series implies these changes take time to reflect in official data. In YoY terms, CPI inflation should come at 3.7% today, even though our economists highlight a greater chance of a lower number than a surprise on the upside. The hawkish repricing of Fed rate bets hinges on expectations that inflation has remained relatively sticky in January. Despite the strong NFP and ISM numbers, faster-than-expected disinflation would bring the real rate discussion to the fore. A rising real policy rate would become increasingly hard to justify as growth should soften materially in 2024. We see the rate-cutting cycle in the US starting in May: markets are currently pricing in June as the start-point, but we reckon the risks of a softer CPI print and weak retail sales to revamp expectations for an earlier cut. The dollar is facing asymmetrical risks skewed to the downside this week, but the magnitude of those risks still looks limited. The strong labour market should still hinder further dovish repricing, and we think the dollar will not capitulate before the second quarter

Crude eyes 200-DMA American crude consolidates gains above $77pb and is preparing to test the 200-DMA to the upside. Trend and momentum indicators are supportive of a move above this level. Aramco says it sees robust global oil demand this year, OPEC and IEA will release their own predictions today and Thursday respectively. Of course, the predictions from OPEC should be expected to be rosier than the reality – because they have all the interest in the world to fuel oil prices – but the strong US growth and decent Chinese stimulus are indeed positive for the supply-demand dynamics. However, note that rising oil prices are a double-edged sword. Good growth is positive for oil prices, but higher oil prices are not good for easing inflation. Hence, any U-turn in inflation would get the major central banks to further tighten their purses' strings, hit growth prospects and hammer a potential oil rally. In conclusion, a rally above the $80pb could be hard to sustain – if the Chinese stimulus story fails to gain traction.

The Commodities Feed: Middle distillate strength Oil prices closed marginally lower yesterday. However, gasoil cracks remain firm, suggesting a tight middle distillate market. Natural gas prices came under pressure on the back of forecasts for milder weather.   Energy - natural gas declines Despite oil prices edging slightly lower yesterday, ICE Brent remains comfortably above US$80/bbl. And while the prompt Brent time spread weakened yesterday, the general trend this year has been for the spread to move into deeper backwardation, suggesting that the market is tightening. Our balance sheet suggests that we will be seeing marginal tightening, with the market in a relatively small deficit in 1Q24. However, what will be of more interest in the coming weeks is what OPEC+ decide to do with their voluntary supply cuts which expire at the end of March. Our balance sheet suggests that the market will be in surplus in 2Q24 if the group fails to roll over part of these cuts. The prompt ICE gasoil crack is now trading a little over US$33/bbl on the back of tightness due to Red Sea disruptions and some refinery outages. The European middle distillate market has been plagued by tightness since Russia’s invasion of Ukraine, which has resulted in drastic shifts in energy flows with the EU banning Russian crude oil and refined products. This has left Europe more dependent on Asia and the Middle East for flows, and these flows are being affected by the Houthi attacks in the Red Sea. Middle distillates are likely to remain well supported in the short term as refineries go into maintenance season. Natural gas markets continue to come under significant pressure. Front-month TTF futures settled a little more than 5% lower yesterday, taking the market below EUR26/MWh. Weather in North West Europe is forecast to be milder than usual over the next week or so, whilst storage remains comfortable at 67% full.  With the end of the heating season quickly approaching, downward pressure is likely to persist. Also not helping sentiment will be the weakness seen in the US gas market.  Front-month Henry Hub closed almost 4.3% lower yesterday due to forecasts for warmer weather over large parts of the country. Along with weaker gas prices, the market is also seeing less volatility. As a result, ICE announced yesterday that it will lower initial margins for front-month TTF futures by 19% to EUR8.67/MWh. The changes will be effective from end-of-day Tuesday. For the energy calendar today, OPEC will release its monthly oil market report, which will include its latest outlook for the market. It will be interesting to see how OPEC views the market ahead of members deciding what to do with their output policy for 2Q24. In last month’s report, OPEC estimated that demand for its oil in 2024 would be 28.5m b/d, which is quite a bit higher than the 26.6m b/d the group is estimated to have produced in January. However, OPEC is estimating that oil demand will grow by 2.25m b/d this year, which does seem fairly aggressive.   Metals – LME zinc inventories rise LME zinc inventories increased by 11,050 tonnes (the biggest daily addition since 20 December 2023) to 238,275 tonnes yesterday - the highest since August 2021. The majority of the inflows were reported from warehouses in Singapore. Meanwhile, on-warrant stocks also increased for a fourth consecutive session, rising by 10,850 tonnes to 206,625 tonnes yesterday. In nickel, Glencore announced plans to sell its stake in a loss-making mine in New Caledonia. The company said that production at Koniambo Nickel SAS (KNS) processing plant will be halted for six months as the plant will be placed in "care and maintenance", while the company initiates a process to identify a potential new industrial partner. The extended weakness in nickel prices has forced many nickel miners to halt or slow down projects recently to cut down on costs. In aluminium, Russian metal accounted for 90% of live metal inventories on the LME in January, marginally down from 90.4% in December, the latest data from the LME showed. Total Russian primary aluminium stocks stood at 286,750 tonnes in January, down from the 338,375 tonnes reported in December

Rates Spark: Treasuries need better than the consensus CPI outcome Markets are awaiting Tuesday’s US CPI release which should give confirmation that the disinflation trend continues. But that's not enough, as a consensus month-on-month outcome would still be a tad too hot for comfort. Looking further ahead, foreign buyers aren't absorbing large UST supply, putting upward pressure on term premium.   US CPI inflation will fall, but Treasury yields are still at risk of rising We're a bit troubled about Tuesday’s CPI report. On the one hand, year-on-year rates will fall, with practical certainty. That's because of a base effect. For January 2023 there was a 0.5% increase on the month, so anything less than this will bring the year-on-year inflation rate down, for both headline and core. So why are we troubled? It's the size of the month-on-month increases. Headline is expected at 0.2% and core at 0.3% MoM. The 0.2% reading is just about okay, especially if it is rounded up to 0.2%. But the 0.3% on core is not okay. That annualises to 4%, which is clearly too high. And it's been at 0.3% MoM for the past two months, and if repeated it would be three of the last four months. Again, that annualises to 4%. If we get the anticipated 0.3%, we doubt there can be a positive reaction. At the other extreme, a 0.4% outcome would be a huge negative surprise, one that would likely cause the probability for a May cut to move comfortably south of 50%. That would throw the easing inflation story up in the air, bringing US Treasury yield with them. But this is unlikely, as the tendency has been for inflation to dip as opposed to spike. We assume a consensus outcome for inflation, and given that, we'd expect to see the 10yr Treasury yield creeping towards 4.25%. For the market to conjure up a positive reaction to the inevitable fall in year-on-year rates, there needs to be a 0.2% MoM outcome for core   Foreign UST appetite not enough to absorb issuance The ECB's Lane spoke about financial flows and shared data that showed renewed interest by foreign investors in eurozone debt securities. Lane notes that foreign investors were a significant seller of eurozone government debt securities in 2021-2022, which matches the period of significant ECB balance sheet expansion. The trend reversed in 2023 when the ECB started unwinding its balance sheet and foreigners became net buyers again. With high debt issuance and a shrinking ECB balance sheet, the growing interest of foreign buyers is welcomed to keep long-end euro yields from rising too much.   In the US the amount of government debt to absorb in the coming years is even larger and foreign investors do not seem to come to the rescue. Looking at US foreign holding statistics in the figure below, we see that foreign holdings are diminishing as a share of total USTs. The significant issuance during the pandemic was not matched by an uptake from foreigners. Instead, as Lane also argued, in the eurozone the central bank was the big buyer. Looking at the downward trend of relative foreign holdings, it seems unlikely that foreign buyers have enough appetite to absorb the increase of USTs from the Fed and the Treasury in the coming years. Low demand from foreign buyers for USTs will have an upward effect on term premia, leading to structurally steeper curves.   Foreign UST holdings as share of public debt in decline   Tuesday's key data and events The main driver of markets will be the US CPI numbers of January. In the shadow of this we have Germany's ZEW survey in the eurozone. The UK's data-heavy week will kick off with employment figures on Tuesday, followed later this week by CPI and GDP data.  We have Italian 3y, 6y and 20y auctions totalling EUR 8.5bn, a GBP 1.5bn 9y Gilt Linker, and a EUR 5bn German Bobl auction.

Gold Monthly: Assessing Fed policy and geopolitical risks Gold has been trading in a narrow range so far this year amid a lack of clarity surrounding the timing of the US Federal Reserve's monetary policy easing cycle. Higher borrowing costs are typically negative for gold.   Geopolitical tensions support gold prices Gold prices have held above $2,000/oz, with the precious metal being supported by safe-haven demand amid geopolitical tensions. Ongoing geopolitical risk in Ukraine and the Middle East continue to provide support to gold. Prices hit an all-time high of $2,077.49/oz on 27 December 2023. Still, we believe the Federal Reserve's wait-and-see approach will keep the rally in check. We expect prices to average $2,025/oz over the first quarter.   Geopolitical risk index   Fed policy remains key We believe Fed policy will remain key to the outlook for gold prices in the months ahead. US dollar strength and central bank tightening weighed on the gold market for most of 2023. Strong GDP and jobs growth show that the US economy continues to shrug off high borrowing costs and tight credit conditions, largely through robust government spending and consumers running down their savings. These factors will be less supportive in 2024 and inflation is on the path to 2%, so the Fed has the room to cut interest rates sharply. Our US economist still expects the Fed to start cutting rates in May. We expect gold prices to remain volatile in the months ahead as the market reacts to macro drivers, tracking geopolitical events and Fed rate policy.   Central bank buying continues Meanwhile, central bank demand maintained its momentum in the fourth quarter with a further 229 tonnes added to global official gold reserves, as shown by data from the World Gold Council. This lifted annual net demand to 1,037 tonnes – just short of the record set in 2022 of 1,082 tonnes – as geopolitical concerns pushed central banks to increase their allocation towards safe assets. Central banks’ healthy appetite for gold is also driven by concerns about Russian-style sanctions on their foreign assets, following a decision from the US and Europe to freeze Russian assets and shift strategies on currency reserves. The People’s Bank of China was the largest single gold buyer, with a total rise of 225 tonnes in its gold reserves over the year. The National Bank of Poland was the second largest buyer in 2023. Between April and November, the central bank bought 130 tonnes of gold, increasing its gold holdings by 57% to 359 tonnes. Gold tends to become more attractive in times of instability and demand has been surging over the past two years, with the trend showing few signs of abating. We believe this is likely to continue this year amid geopolitical tensions and the current economic climate.   Central banks purchases in 2023 (tonnes)   Central banks demand (tonnes)   2024 starts with continued ETF outflows Yet, total holdings in bullion-backed ETFs have continued to decline. January saw eight monthly outflows in global gold ETFs, led by North American funds. This was equivalent to a 51-tonne reduction in global holdings to 3,175 tonnes by the end of January, as shown by data from the World Gold Council. With the bets on early rate cuts from major central banks being pushed back, investors’ interest in gold ETFs faded. Looking further ahead, however, we believe we will see a resurgence of investor interest in the precious metal and a return to net inflows given higher gold prices as US interest rates fall.  

The Commodities Feed: Oil trades softer Crude oil has been softer amid some optimism around the Israel-Hamas conflict. Speculators trimmed their net longs last week as supply risks in the Middle East have eased for now.   Energy: Oil edges lower ICE Brent opened lower this morning with prices hovering around US$81.5/bbl on reports of easing worries over the Israel-Hamas conflict. Recent reports suggest that Iran held talks in recent days in Beirut, including with senior officials from Hamas to explore a diplomatic solution. Meanwhile, trading volumes were relatively subdued as the Chinese markets have been closed for the Lunar New Year Holidays. As for the calendar this week, market participants will await the release of the monthly reports from both OPEC and the International Energy Agency for further indications of supply and demand. Meanwhile, weekly data from Baker Hughes shows that the number of US oil rigs remained unchanged over the last week, with the total oil rig count standing at 499, whilst gas rigs rose by four, taking the total rig count (oil & and gas combined) to 623 for the week ended 9 February 2024. US oil rigs have remained quite flat since the start of the year and the volatility in oil prices could weigh on further rig additions over the coming weeks. The latest positioning data from CFTC shows that speculators decreased their net long position in NYMEX WTI by 55,265 lots after reporting two consecutive weeks of increases, leaving them with net longs of 94,963 lots as of 6 February 2024. Similarly, money managers decreased their net longs in ICE Brent by 23,060 lots over the last week, leaving them with a net long position of 238,356 lots as of last Tuesday. TTF prices fell over 3% this morning and extended the declines for a third straight session as mild weather and strong import flows indicate that the region will end the winter season with comfortable storage levels. Recent data from Gas Infrastructure Europe shows that the EU storage levels currently stand at 67.8% of storage capacity compared to the five-year average of around 58%. Subdued economic activity along with warmer-than-average temperatures have allowed the region to restock, which is keeping gas prices under pressure Metals: Lead exchange inventories rise Recent LME data shows that exchange inventories for lead reported inflows of 6,250 tonnes (the biggest daily addition for the year) for a ninth straight session to 150,675 tonnes as of Friday, the highest since October 2017. The majority of the inflows were reported from warehouses in Singapore. Meanwhile, on-warrant stocks extended additions for a fifteenth consecutive session and rose by 6,250 tonnes to 132,950 tonnes at the end of last week. However, the cash/3m for lead stood at a backwardation of US$10.2/t as of Friday, compared to a backwardation of US$1.25/t a day earlier. As for nickel, Norilsk nickel maintained its 2024 supply surplus expectations for the global nickel market that it made at the end of November last year. The group expects the nickel market to encounter a surplus of 190kt this year, primarily due to an increased supply of low-grade nickel in Indonesia. Meanwhile, it is estimated that the drastic drop in nickel prices has forced some of the projects to shut down, which might decrease production and eventually reduce the market surplus slightly. Norilsk Nickel estimates a market surplus of over 250kt in 2023. Meanwhile, the latest positioning data from the CFTC shows that managed money net longs in COMEX gold increased by 10,615 lots (after reporting declines for four straight weeks) to 82,591 lots as of 6 February 2024. The move higher was driven by falling gross shorts by 6,376 lots. Among other precious metals, speculators flipped to a net short of silver (after remaining net long in the previous week) as short positions outnumbered long positions by 4,784 lots over the last reporting week. Meanwhile, speculators increased their net shorts of copper by 17,224 lots to 20,5554 lots over the last reporting week. The move was driven by rising gross shorts by 13,620 lots to 71,999 lots.

Czech National Bank Preview: Time to catch up We expect the pace of cutting to accelerate to 50bp, which will push the CNB key rate to 6.25%. The main reasons will be low inflation in the central bank's new forecast, which should allow for more cutting in the future. For year-end, we see the rate at 4.00% but the risk here is clearly downwards.   Optimistic forecasts could speed up the cutting pace to 50bp The Czech National Bank will meet on Thursday next week and will present its first forecast published this year. We are going into the meeting expecting an acceleration in the cutting pace from 25bp in December to 50bp, which would mean a cut from the current 6.75% to 6.25%. This means a revision in our forecast, which previously saw an acceleration taking place in March. Still, it's certain to be a close call given the cautious approach of the board – and that could bring a 25bp cut.   The board will have a new central bank forecast, which is likely to be a key factor in decision-making. Here we see the need for revision in a few places, but overall everything points in a dovish direction. On the global side, compared to the November forecast, we expect the CNB to revise down both GDP growth, rates and oil prices. On the domestic side, inflation has surprised downwards only slightly in the past three months for both headline and core inflation. Still, we expect some downward profile shift due to a better outlook for food, energy and oil prices. As for GDP, the CNB was the most pessimistic forecaster in the market in November and the incoming data was rather mixed in this regard, so we expect only modest changes here. The CZK was 0.35% stronger than the central bank's expectations in the fourth quarter of last year. On the other hand, it was slightly weaker in January. Overall, we do not see any significant impact on the new forecast here, but the lower EURIBOR profile after the revision may indicate a stronger CZK in the new forecast, or allow for faster rate cuts in the CNB model. The November forecast indicated roughly a 50bp cut in the fourth quarter last year and reaching 3.50% by the end of this year, delivering a total 350bp of rate cuts. As we know, the CNB delivered only 25bp last year, which will need to be reflected in the new forecast. Overall, we expect a slightly steeper rate path again with a 3.00% level at the end of 2025, which should have a dovish outcome for the market in our view. As always these days, we can also expect several alternative scenarios, one of which will be the board's preferred scenario, showing a slightly slower rate cuts profile than the baseline.   Inflation nowcast will be key to the decision We see from public statements that the dovish wing of the board (Frait, Holub) will push for a faster pace of rate cuts given inflation numbers indicating a quick return to the 2% inflation target this year and will be open to more than 50bp of rate cuts. For the rest of the board, we think the inflation indication for January and beyond in the central bank's new forecast is key. We are currently expecting 2.7% for January headline inflation, with room for it to come in lower if the anecdotal evidence of January's repricing is confirmed. This, in our view, will give the rest of the board the confidence to accelerate the pace of cutting as early as this meeting.   4% at the end of the year or lower depending on core inflation Looking forward, we believe the favourable forecast for the coming months will allow the 50bp pace to continue. Here, our forecast remains unchanged and we think core inflation will still prevent the board from going faster later. We therefore still assume a 4% key rate at the end of this year. But if core inflation continues to surprise to the downside, we find it easy to imagine lower levels here.     What to expect in FX and rates markets The CZK has weakened in recent days following comments made by Deputy Governor Jan Frait and touched 24.90 EUR/CZK, which is basically the weakest level since early 2022. If the CNB delivers a 50bp rate cut, it's obviously negative news for the CZK. But on the other hand, we believe that the market positioning is already heavy short and rates are already pricing in the vast majority of CNB rate cuts. That's why we see the cap at 25.20 EUR/CZK. A minor cut, however, could bring a temporary strengthening towards 24.70 given heavy dovish expectations. In our base case scenario, we think that after the 50bp rate cut and January inflation, the market should have hit the limit of what can be priced in and the CZK should start appreciating again later this year thanks to the economic recovery, good current account results and falling EUR rates improving the interest rate differential. The rates market fully priced in a 50bp move recently and expects another 50bp move for the next meeting, which is close to our forecast. However, the terminal rate is already priced in at 3% at the end of this year, which we don't have on paper until next year – but we still see this as a possible scenario if inflation remains under control. If we do see the CNB's forecast, the market can easily get excited for a lower terminal rate and overshoot market pricing. Therefore, we expect the combination of the 50bp cut and the dovish forecast to push market rates further down, resulting in further steepening of the curve. In the bond space, we maintain our positive view here going forward. Czech government bond supply has fallen significantly as we expected and, combined with the inflation profile and central bank cutting rates, offers a perfect combination in the CEE region. Here, we continue to prefer belly curves and see more steepening.

French industrial output continues its rebound French industrial production rebounded sharply in December. The worst appears to be over for the sector, and its recovery is set to continue into 2024. A brighter start to 2024 French industrial production rebounded sharply in December, rising by 1.1% over the month, following on from November's increase (+0.5% over the month). The data are also good in the manufacturing industry sub-sector, where production is up by 1.2% over the month (after +0.2% in November). The manufacture of transport equipment, industrial products and agri-foodstuffs all rose sharply in December. On the other hand, production fell in the equipment goods manufacturing branch. All in all, between the end of 2022 and the end of 2023, French manufacturing output rose by 0.3%. From these figures, we can conclude that the French industrial sector continues to recover. After a very complicated 2023 overall, the end of the year was a little better and suggests that 2024 is beginning under better conditions. The worst is probably over. In fact, all the indicators already published for January suggest that the recovery in industry should continue in the first quarter. In the surveys, industrial companies are slightly more confident about the future and more optimistic about their production in the coming months. In addition, order books have started to rebound, albeit still at very low levels. Demand no longer seems to be weakening. There are therefore signs of a sustained rebound in the industrial sector, and we can expect production to grow slightly faster in 2024 than in 2023. However, this rebound is likely to be gradual and not continuous over the course of the year, as external shocks such as blockades, strikes or geopolitical events could temporarily limit industrial output.   GDP growth to remain weak While the rebound is already visible in the industrial sector, this is not necessarily the case in other sectors. As a result, the better industrial performance will not be enough to produce dynamic GDP growth in the first quarter of 2024, and growth is likely to remain close to 0%. For the year as a whole, even if we expect a gradual recovery in other sectors from spring onwards, the very low starting point means that we are only forecasting 0.5% GDP growth in 2024 (compared with 0.8% in 2023). This is a much lower figure than the government's – likely unattainable – forecasts.

CZK: Changing our central bank call to a 50bp rate cut The blackout period for the Czech National Bank (CNB) began yesterday and we will therefore probably not hear anything more. Deputy Governor Jan Frait really moved the market when he said he was open to a larger rate cut, even more than 50bp at the 8 February meeting. We do know that the deputy governor was one of two board members who voted for a rate cut back in November when the CNB left rates unchanged. So the new statements aren't exactly a game changer, but we have confidence that at least two members will push for a 50bp rate cut at next week's meeting. In addition, the board will have a new forecast which we think should show very low inflation of below 3% for the upcoming months. Overall, this leads us to reassess our call from a 25bp to 50bp rate cut next week. The acceleration of the rate cut is bad news for the CZK. However, we believe positioning has been heavily short here for some time and should not be so damaging. Moreover, the market is already pricing in a large portion of the rate cuts. Therefore, we do not expect significant weakness from this, but of course a short trip above 25.0 EUR/CZK is likely next week.

CEE: Busy political scene in the region A busy week in the region comes to an end after a hawkish National Bank of Hungary surprise on Tuesday, another conflict between the president and the government in Poland on Wednesday and an agreement with Hungary at the EU summit yesterday. However, we can at least take some risk events off the table. Next week we will see central bank meetings in Poland and the Czech Republic and the first January inflation in the CEE region in Hungary. So markets should return to the normal agenda and regain their footing. Following the EU summit chapter, the market in Hungary has started to price in rate cuts again as expected, and we think that with the inflation print next week the market will fully switch into rate-cutting mode again. Therefore, it is hard for us to be positive on the HUF at these levels as we discussed here earlier. In fact, we prefer PLN here, which seems to have become used to the political noise and has grown more resilient. Moreover, it remains the only currency supported by rates. On both sides, we think the gains have gone too far, but in the case of PLN it is not that hard to imagine an improving interest rate differential due to falling core rates supporting FX. The same cannot be said in the case of HUF.

EUR: Core inflation disappoints Short-date eurozone interest rates got a lift yesterday from the January CPI numbers where core inflation did not fall as much as expected. Our economists make a great point that the European Central Bank could be concerned that companies do have the pricing power to avoid margin pressure and will pass higher wage costs onto the consumer. Hence it makes perfect sense for the ECB to wait until June, when it will have the wage data, to cut interest rates.   EUR/USD did not spend too long under 1.08 at all yesterday. If today’s US NFP figure is indeed benign, then EUR/USD can knock on the door of 1.0875/0900 again. However, one month EUR/USD realised volatility continues to drift around the lows near 6% and low implied volatilities suggest that investors are not expecting a pick-up in FX volatility anytime soon. Elsewhere, we were a little surprised at how the Riksbank did a full U-turn from one last hike in early 2024 to not ruling out a cut in the first half of this year. Unlike the Bank Of England, the Riksbank clearly seems more confident of its disinflation trend. This could end up proving a SEK negative over coming months and could favour an extension of this year’s GBP/SEK rally – perhaps even to the 13.50 area.

FX Daily: US employment continues on a benign trend? The focus in FX markets today is on whether US employment continues on its benign downward path and represents the economy coming into ‘better balance’. Of interest will be whether December’s number gets revised down – marking 11 downward revisions out of 12 last year. We could see the return of a marginally more pro-risk environment.   USD: Jobs report in focus This week’s price action in US rates markets is instructive. Despite the Federal Reserve pushing back against prospects of a March cut, interest rates have still come lower. That may be a function of investors watching US regional banks remain under pressure. Or more likely it reflects a conviction call that policy rates are coming lower this year and there is no point fighting this overwhelming trend. This is the reason that the dollar did not build on gains seen early yesterday. Coming to today, we have the US January jobs report. Consensus is for +185k in jobs gains, while we forecast +200k. However, the Fed seems pretty comfortable that the labour market is coming into better balance and we doubt a +200k number needs to trigger a major repricing of the Fed easing cycle. Instead, we are interested to see whether December’s +216k number is revised down. This would then represent 11 of the last 12 nonfarm payroll (NFP) jobs releases being revised lower and support the Fed’s contention that tight US labour markets are a thing of the past. We typically have a slight negative bias for the dollar on NFP day on the working assumption that investors use NFP-inspired FX liquidity to put money to work outside of the dollar. We also again want to highlight that 9 February could be a big day for FX markets. Annual US CPI benchmark revisions are released today and will confirm whether the late 2023 US disinflation trends are real – or get revised away.   DXY has been trading an exceptionally tight 102.77 to 103.82 range over the last two weeks – but may be due a test of lower levels now

Asia Morning Bites South Korea's inflation comes in below expectations. US non-farm payroll release later tonight. Powell slated to speak again at the weekend.   Global Macro and Markets Global markets:  Despite some reasonably strong data, US Treasury yields dipped slightly on Thursday. 2Y yields were down less than a basis point, but only after dropping below 4.14% and then recovering later on. 10Y yields followed a similar pattern of decline and recovery taking them down 3.2bp to 3.97%. Jerome Powell has a TV interview scheduled for the weekend, which could be interesting if he deviates from the recent message at the FOMC. Currencies also had a choppy day. EURUSD dropped below 1.08 at one point but is back up to 1.0874 now. Likewise, the AUD came close to dropping through 65 cents but has recovered to 0.6575 now. Cable did even better, finishing up on the day after a less dovish than expected Bank of England meeting. The JPY was roughly unchanged at 146.47. Other Asian FX were evenly split with half making small gains, led by the PHP and THB, and half making small losses. The CNY has drifted up to 7.1805. US equities recovered their losses from the previous day. The S&P 500 rose 1.25%, while the NASDAQ gained 1.3%. Equity futures also look quite positive. Chinese stocks had a slightly more positive day. The Hang Seng rose 0.52%, but the CSI only managed a 0.07% gain. G-7 macro: It was an interesting day for US macro yesterday, delivering support for both hawks and doves on the rates outlook. On the dovish side, non-farm productivity rose, and there was also a slight increase in jobless claims figures. On the other hand, the manufacturing ISM rose strongly, even though it remained below the breakeven 50 level and there was a jump in the prices paid component too which jumped up to 52.9 from 45.2. The new orders index was also strong. Later today, there is the US labour report. Following the soft ADP figure earlier this week, there may be some downside risk to the consensus view of a decline in employment growth from 216K in December to 185K in January.    South Korea:  Consumer inflation eased to 2.8% YoY in January (vs 3.2% in December, 2.9% market consensus), back to the 2% level for the first time in six months. But the decline was mainly due to base effects, caused by a one-off energy bill hike last January. Core inflation, excluding agricultural products and oils, also levelled down to 2.6% (vs 3.1% in December). In a monthly comparison, inflation rose 0.4% MoM nsa in January after staying flat in December. Fresh food, utility, and service prices rose, more than offsetting the decline of manufactured food and gasoline prices. The government has decided to freeze utility fees at least for the first quarter of the year and offered some tax cuts on imported goods. If the conflict in the Red Sea escalates further, the fuel subsidy program could be extended beyond March, so the upside risk is quite limited in the near term. Today’s slower-than-expected inflation probably won’t change the BoK’s hawkish stance any time soon. As mentioned earlier, if there were no government subsidies on energy and public services, CPI inflation would have been higher than it is today, and once these programs end, there may be a price spike later this year. So, choppy inflation ahead is expected. The BoK will likely take a wait-and-see approach to gather more evidence about the continued cooling of inflation.

Expect the Bank to drop its tightening bias Financial markets expect the Bank Rate to be one percentage point lower in two or three years' time than was the case in November. That will have important ramifications for the Bank’s two-year inflation forecast, which is seen as a barometer of whether markets have got it right on the level of rate cuts priced. Previously, the Bank’s model-based estimate put headline inflation at 1.9% in two years’ time, or 2.2%, once an ‘upside skew’ is applied. We wouldn’t be surprised if this ‘mean’ forecast (incorporating an upside skew) is still a little above 2% in the new set of forecasts. And if that’s the case, it can be read as the BoE subtly pushing back against the quantity of rate cuts markets are pricing in. If that happens, we suspect markets will largely shrug it off. The bigger question is whether the Bank makes any changes to its statement – and its forward guidance currently reads like this: Policy needs to stay “sufficiently restrictive for sufficiently long.” It’s likely to stay restrictive for “an extended period of time.” “Further tightening” is required if evidence of “more persistent inflationary pressures.” We think the baseline assumption going into this meeting is that the last of those sentences gets dropped and that the three hawks who'd been voting for a rate hike in December finally throw in the towel, given the recent run of inflation data. A hawkish surprise is, therefore, a statement that looks much the same as December’s, with at least one or two committee members voting for a further rate hike. A dovish surprise would see the Bank remove or water down the sentence on how long policy needs to stay restrictive. There’s also a tail-risk that Swati Dhingra, known to be the most dovish committee member, votes for a rate cut, though our base case is a unanimous decision to keep rates unchanged (6-3 previously).     Markets seem more sensitive to dovish nuances of late The market discount for BoE rate cuts has moderated. At the end of last year, a first cut by May was still fully discounted, and overall more than six cuts were fully priced in for 2024. This has come back towards slightly more than 50% implied probability of a May cut and four cuts overall being priced in. These are not unplausible scenarios but are obviously dependent on data and, for instance, the government's tax plans. But looking at markets more globally, they appear more sensitive to softer data and any dovish nuances provided in communications. As such, we do see a possibility for front-end rates to tick slightly lower if the MPC, for instance, removes its hike bias - in its commentary as well as the voting split. Further out the curve 10Y gilt yields have risen back towards 4% from around 3.5% at year-end. But yields appear capped at 4%, facing resistance to move higher. If we take a simple modelling approach, augmenting a short-term money-market-based estimate of the 10Y gilt with yields of its US and German bond peers, we conclude that gilts see slightly too high yields already. Keep in mind that the BoE meeting is flanked by the Fed meeting, jobs data in the US, and the CPI release in the eurozone, which should be crucial in driving wider sentiment. When it comes to FX markets, sterling has been the best-performing G10 currency against the dollar this year. Its implied yield of 5.2% means that it is the only G10 currency up against the dollar on a total return basis this year. As above and given that the market is minded to look for the more dovish interpretation of central bank communication in what should be a year of disinflation, the idea of the BoE playing dovish catch-up with the Fed and the ECB could be a mild sterling negative.  That probably means that EUR/GBP will struggle to maintain any break below strong support at 0.8500 in the near term, and the BoE event risk means EUR/GBP could start to trade back over 0.8600.  However, our end-quarter target of 0.8800 looks too aggressive now. Scope for tax cuts in early March, sticky services inflation and composite PMI readings comfortably above 50 in the UK could well mean that EUR/GBP traces out a 0.85-0.87 range through the first half of this year. For GBP/USD, the FX options market currently prices a very modest 42 USD pips of day event risk around the Wednesday FOMC/Thursday BoE meeting. Our baseline scenario assumes GBP/USD could trade back down to/under 1.2700 on Thursday, especially should the FOMC meeting have disappointed those looking for a March rate cut from the Fed.

Four scenarios for the Bank of England's February meeting Expect the BoE to drop the pretence that it could hike rates again but to continue signalling rates will stay restrictive for an "extended period". With services inflation and wage growth to remain sticky in the near term, we think August is the most likely starting point for rate cuts.   Four scenarios for the Bank of England meeting   The BoE seems more reticent than other central banks to endorse rate cuts Both the Federal Reserve and European Central Bank have hinted, with varying degrees of caveats, that rate cuts are on the cards this year. So far, the Bank of England hasn’t followed suit. It was careful not to say anything at the December meeting that could be misconstrued as an endorsement of market pricing on cuts. And there has essentially been radio silence from committee members since then. We suspect the Bank will still want to tread carefully as it gears up for the first meeting of 2024. But the reality is that defending a “higher for longer” stance on interest rates is getting harder as the inflation backdrop shows signs of improving. Remember that the BoE has pinned the chances of rate cuts on three variables. One is the strength of the jobs market, but data here is suffering from well-known reliability problems. So, in practice, it comes down to services inflation and private-sector wage growth. Both are tracking well below the November BoE projections. Services CPI is currently 6.4%, and despite that coming as an upside surprise to consensus when it was released, it’s still half a percentage point below the BoE’s projection. Private wage growth is 6.5%, but remember this is a three-month average and the latest two ‘single month’ readings are around 6%. When we get the data in a couple of weeks, this variable is likely to have ended the year a full percentage point below the BoE’s most recent forecast (7.2%). Add in the fact that natural gas prices are noticeably lower across the futures curve, and we should see sizeable downward revisions to the Bank’s inflation forecasts for this year. But what happens to the forecasts beyond 2024 is less clear-cut.   Financial markets expect roughly four UK rate cuts this year

The Fed's Silicon Valley Bank solution is gone. Should we worry? Almost a year ago SVB imploded. One of the subsequent calming solutions came through the Bank Term Funding Facility. It had a one year shelf life, and will soon be gone. It's actually been abused recently, which required a change of terms. But taking it away is not without risks. A softer exit might have been better, but we see the logic of taking the cake away.   The BTFF's demise can be construed as a sign of Fed confidence in the system The Federal Reserve has changed the rate charged on the Bank Term Funding Facility (BTFF), and for good reason. Previously the reference rate was 1yr term SOFR (+10bp fee). Term rates incorporate the future, and as the market is discounting rate cuts, the 1yr term SOFR rate trades some 50bp through the overnight SOFR rate. The Fed’s action confirms that there were players in the market taking advantage of the arbitrage by borrowing on the BTFF and lending back at a higher in-arrears rate. The Fed has now floored the reference rate to the interest on excess reserves (IOER), which is currently at 5.4%. That takes away the arbitrage. Which makes eminent sense. But what about the Fed’s decision to end the facility on its one year anniversary? Originally it was set out as a facility that would be available for a year, book ended by the Silicon Valley Bank (SVB) demise on 10 March 2023 and the one year tenor for the facility to conclude on 11 March 2024. But the Fed always had the choice to extend it. The decision not to extend it could be construed as a sign of confidence. No doubt the Fed has done its due diligence on the players that have accessed the facility, and has concluded that the need for an extension is not there. This is good, as it points to a Fed that is not concerned about the players that have used the facility. In other words they can take it. Moreover, and by implication, the Fed does not envisage a threat of a similar ilk hitting the system down the line. And if something does hit, the Fed points to the discount window as the place to get hands on emergency liquidity. It had been noted that some of the smaller players were not used to discount window access in March last year, with some getting into difficulty that they did not need to get into. The alternative BTFF, the story went, was an all-embracing rescue programme for some institutions that addressed the deep discount attached to many hold-to-maturity portfolios, by instantaneously liquefying them at par.    

UK: Bank of England to drop tightening bias but remain cautious on rate cuts The Bank of England was careful not say anything at the December meeting that could be misconstrued as an endorsement of market pricing on rate cuts. Investors are currently pricing roughly 100bp of cuts this year. But the reality is that defending a “higher for longer” stance on interest rates is getting harder to defend as the inflation backdrop shows signs of improving. Both services inflation and private-sector wage growth, the two variables guiding BoE policy right now, are well below the Bank’s November projections. Even so, we expect the Bank will still want to tread carefully. Lower market rates will at least offset the recent improvement in inflation and it’s possible the BoE’s two year-ahead forecast will be a little above 2%. What really matters for markets though are what the Bank does to its policy statement. We suspect it will drop the suggestion that it could raise rates further, but keep the signal that rates need to stay restrictive for an extended period. As for the vote split, we suspect the hawks will finally throw in the towel and stop voting for a rate hike. At the same time, we think it’s probably too early to see the doves voting for a cut. That leads us to expect a unanimous decision to keep rates on hold.  

US: Federal Reserve expected to keep the Fed funds target range unchanged at 5.25-5.50% The Federal Reserve is widely expected to keep the Fed funds target range unchanged at 5.25-5.50% on Wednesday while continuing the process of shrinking its balance sheet via quantitative tightening. At its December FOMC meeting we saw a dovish shift from the Fed, signalling that it expected to cut the policy rate by 75bp this year. Given the perception that the Fed always starts out conservatively and typically ends up shifting policy by more than initially suggested, this was interpreted by markets as giving them the green light to push on more aggressively. Just a few weeks ago seven 25bp moves were being priced by markets for this year with the first cut coming in March, but recent strong jobs and activity data have since scaled that back to a 50-50 call while Fed commentary has also suggested that FOMC members are not in a hurry to cut. Nonetheless, inflation pressures continue to softenc, with the Fed’s favoured measure of inflation, the core PCE deflator, running at 2% annualised for two consecutive quarters. We think it is only a matter of time before they do indeed cut interest rates, but we think the starting point will be in May. We continue to see some downside risks for growth in the coming quarters relative to the consensus as the legacy of tight monetary policy and credit conditions weighs on activity and Covid-era accrued household savings provide less support. Our forecast is for the Fed funds target range to be cut to 3.75-4% by the end of this year. On Friday, we have the US jobs report for January. It does feel as though there have been a growing number of job lay-off announcements, but this is not apparent in jobless claims data. We have little survey data to go on at this stage, but given the strength in activity numbers, there seems little reason to expect the jobs market to roll over. We look for payrolls growth of around 200,000, once again led by government, leisure and hospitality and education and healthcare services. Nonetheless, the household survey is expected to show the unemployment rate ticking a little higher to 3.8%.  

Dutch medicine shortage gets even worse The Dutch medicine shortage increased by 51% last year. This worrisome development should warrant more attention from policymakers. Potential solutions, such as bringing notably generic medicine production back to Europe, are possible but costly.   Dutch medicine shortage continues to mount We researched the European medicine shortage late last year and predicted that shortages will continue to rise for the foreseeable future. New data published this week on the Dutch medicine shortage confirmed our fears. Unfortunately, Dutch drug shortages increased by 51% in 2023 compared to 2022. In 2023, there were 2,292 instances where patients could not get the medicine they required, up from 1,514 in 2022.  Many European governments are currently reflecting on their dependencies in a changing world. These discussions on 'strategic autonomy' technology, and microchips especially, are on everyone's lips. However, most (generic) medicine is produced overseas, mainly in India and China. With shortages continuing to rise and with ageing populations, medicines should be at the forefront of these discussions.  Solutions, like bringing, notably, generic medicine production back to Europe, are possible but costly. Yet, policymakers can ill afford to wait and need to make decisions, not least on funding. Otherwise, medicine shortages in Europe will likely keep increasing.  Dutch medicine shortage continues to mount Number of instances in which a medicine was not available in Dutch pharmacies   We've written more extensively on Europe's medicine shortage and the potential solutions here

Eurozone monetary developments turn somewhat favourably December saw bank lending to the private sector increase modestly again due to more borrowing from corporates. The overall lending environment is still very muted though, making us cautious about overinterpreting the December tick-up. Bank lending in December showed another increase from non-financial corporates. The month-on-month increase of 0.3% was not huge but still the strongest increase since October 2022, indicating that businesses are cautiously starting to borrow more again after about a year of stagnation. For households, borrowing was slightly negative again month-on-month, which indicates that stagnation in bank lending to households continues. Overall, this means a small pick-up in private-sector bank lending, which is interesting given the fact that the European Central Bank's bank lending survey released earlier this week painted a more negative picture of the environment. Lending demand was, in fact, weaker in 4Q according to the survey, but the hard data published today shows a modest increase in actual borrowing over the quarter. Money growth (M3) also continued to bottom out and returned to a positive annual growth rate, from -0.9% in November to 0.1% in December. Don’t read too much into that as broader developments muddy the relationship between money growth and the economy, but still it is interesting to see that monetary developments in general show some signs of cautious improvement. Overall though, today’s data shows that lending is still very muted and that the monetary transmission is clearly weighing on investment. The two months of small increases in bank lending to businesses are not yet a trend, and as the bank lending survey suggests that fixed investment needs are still weighing on loan demand, we are cautious about expecting stronger investment on the back of this.

Federal Reserve to downplay chances of imminent action while holding rates steady The dovish shift in Fed forecasts in December – with three rate cuts pencilled in for 2024 – incentivised the market to push even more aggressively in pricing cuts. However, they appear to have gone too far too fast for the Fed’s liking, even though inflation is almost back to target.   Expect more pushback against a March rate cut The Federal Reserve is widely expected to keep the Fed funds target range unchanged at 5.25-5.50% next Wednesday while continuing the process of shrinking its balance sheet via quantitative tightening – allowing $60bn of maturing Treasuries and $35bn of agency mortgage backed securities to run off its balance sheet each month.  At the December Federal Open Market Committee meeting there was undoubtedly a dovish shift. We got an acknowledgement that growth "has slowed from its strong pace in the third quarter" plus a recognition that "inflation has eased over the past year". With policy regarded as being in restrictive territory, the updated dot plot of individual forecasts indicated the committee was coalescing around the view that it would likely end up cutting the policy rate by 75bp this year.  This was interpreted by markets as giving them the green light to push on more aggressively. Given the Fed’s perceived conservative nature the risks were skewed towards them eventually implementing even more than it was publicly suggesting. At one point seven 25bp moves were being priced by markets with the first cut coming in March. A March interest rate cut looked too soon to us given strong growth and the tight jobs market, so the recent Fed official commentary downplaying the chances of an imminent move hasn’t come as a surprise. Markets are now pricing just a 50% chance of such a move with nothing priced for the 31 January FOMC.   Fed funds target rate (%) and the period of time between the last rate hike and first rate cut in a cycle   But the statement will shift to neutral In terms of the accompanying statement we do expect further changes. The December FOMC text added the word “any” to the sentence “in determining the extent of any additional policy firming that may be appropriate to return inflation to 2 percent over time”, offering a clear hint that that interest rates have peaked. The commentary ahead of the blackout period had suggested the Fed saw no imminent need for a rate cut, so we expect it to continue to push back against an early move, but continuing talk of rate hikes in the press statement is not going to look particularly credible to markets. The Fed could choose to go back to its previous stock phraseology (used in January 2019 when it held policy steady after it had hiked rates one last time in December 2018) that “in determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realised and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective”.   And rate cuts are coming... Despite this, we believe the Fed will end up delivering substantial interest rate cuts. We continue to see some downside risks for growth in the coming quarters relative to the consensus as the legacy of tight monetary policy and credit conditions weighs on activity and Covid-era accrued household savings provide less support. Inflation pressures are subsiding with the quarter-on-quarter annualised core personal consumer expenditure deflator effectively saying 'job done' after two consecutive quarters of 2% prints. The Fed’s current view is that the neutral Fed funds rate is 2.5%, signalling scope for 300bp of rate cuts just to get us to 'neutral' policy rates. Moreover, the 'real' policy rate, adjusted for inflation, will continue to rise as inflation moderates. We believe the Fed will choose to wait until May to make the first move, with ongoing subdued core inflation measures giving it the confidence to cut the policy rate down to 4% by the end of this year versus the 4.5% consensus forecast, and 3% by mid-2025. This will merely get us close to neutral territory. If the economy does enter a more troubled period and the Fed needs to move into 'stimulative' territory there is scope for much deeper cuts.   The Fed is knee-deep in technical adjustments, and there's likely more to come on the QT front One item has already been dealt with ahead of the FOMC meeting – the end of the Bank Term Funding facility. See more on that here. One of the takeaways is the notion that the Fed is comfortable with the system. That at least sends a comfort signal to the market. In that vein, the Fed ignited an accelerated discussion on potential tapering of the its quantitative tightening (QT) agenda ahead. Currently the Fed is allowing some $95bn of bonds to roll off its balance sheet on a monthly basis. So far this has not pressured bank reserves, which are in the $3.5bn area. The Fed has been quoted as viewing this as comfortable, with the implication that they can fall, but not by too much. The 10% of GDP back-of-the-envelope target would be in the area of $3tn. Most of the pressure from QT programme is being felt through lower reverse repo balances going back to the Fed on the overnight basis. Ongoing balances there are running at around $550bn, down by some $1.8tn since March 2023. That pace of fall is in excess of the monthly pace of QT. The residual is accounted for by a rise in the US Treasury cash balances at the Fed. Bottom line, there are two sources of comfort here. First, room from the reverse repo balance of $550bn. That can get to zero without a material impact on bank reserves. Second, the fact that bank reserves themselves have a $500bn comfort factor between $3.5tn now to the $3tn area neutral. There is no urgency for Fed to set a plan in place, but it seems they want to get cracking on it. It’s likely the Fed formulates a plan to slow the pace of QT over the second half of the year, as by mid-year we expect to see the reverse repo balances pretty close to zero. Maybe cut it by a third for starters. We’d then be on a glide path over the second half of 2024 where bank reserves would begin to ease lower. We’d then expect QT to have concluded by year-end. Over to the Fed to see how they deal with it.   Dollar bears require patience We feel it is a little too early for the Fed to pump more air into the easing narrative and would probably prefer to let the data do the talking. However, the conviction is there in markets that the Fed and other major central banks will be in a position to cut later this year. This suggests that the dollar does not have to rally too far on any Fed remarks seen as less than dovish. For the time being we see no reason to argue with seasonal factors which normally keep the dollar strong through the early months of the year. We retain a 1.08 EUR/USD target for the end of the first quarter, but expect a clearer upside path to develop through the second quarter once the first Fed cut looks imminent.   

Spain's unemployment rate falls in the fourth quarter Spain's unemployment rate dropped to 11.76% in the fourth quarter of 2023 from 11.84% in the previous quarter, reflecting a resilient labour market amid the economic slowdown. Spanish unemployment rate down in final quarter of 2023 Spain's unemployment rate fell to 11.76% in the fourth quarter of 2023 from 11.84% in the previous three months, as data from the National Statistics Institute showed this morning. Despite an economic slowdown, the labour market performed well during this period. Previously published figures already showed that seasonally adjusted job growth continued in the final months of 2023, albeit at a slower pace than earlier in the year. The buoyant labour market remains a crucial driver of economic growth in the country. While Spain's unemployment rate is historically low, it is still much higher than in other eurozone countries. Various reforms – particularly the 2022 labour reform – have successfully curtailed the prevalence of temporary contracts, enhancing job stability and positively impacting unemployment rates. But further reforms will be needed in the coming years. We expect the unemployment rate to continue to hover around these historically low rates in 2024. In the first months of this year, slowing job creation and labour force growth due to strong immigration flows may put some upward pressure on the unemployment rate. But on the other hand, accelerating economic growth will keep the labour market tight. For all of 2024, we forecast an average unemployment rate of 11.6%. In 2025, we expect the unemployment rate to head slowly downwards to 11.2%.

Rates Spark: Feeding the doves ECB President Lagarde's lack of pushback bull steepened euro curves as markets pencil in a high probability of early rate cuts. There may be less dovish sounds in coming days as other ECB speakers take the stage. Thursday's US data had something for all, but were net bullish for bonds. However, the March cut expectation still has some unwind to get done. US data on Thursday is bond supportive, but we're still not getting a March rate cut. That still needs to be unwound The strong US fourth quarter 2023 GDP number makes it more likely that first quarter 2024 will be weaker, according to our economist James Knightley. Inventories are going to be making a negative contribution and trade is likely to also swing back to becoming a headwind while consumer momentum is also slowing somewhat. Early days, but we are pencilling in a 1-1.5% figure for the first quarter – the current consensus is for GDP growth of just 0.6%. Also, the Fed's favoured measure of inflation – the core personal consumer expenditure deflator – has come in at 2% annualised for the second quarter in a row. Inflation on these measures has tamed, but growth has not, or at least not yet. We saw yery jumpy price action. But there is nothing here to accelerate a rate cut in March in any meaningful way, and that’s been the biggest driver of the 10yr yield since the beginning of the year. So, it does not surprise to see yields tempted lower on a temporary basis as the price data is indeed good. But the activity data is enough to result in the reaction into next week being one of a further edge higher in the 10yr yield. These are fine lines though as we don’t anticipate a big bear market. Far from it, as we see yields lower by mid-year, and well ahead of that. But the stars have not yet aligned to take a second leg lower in yields just yet. Also an interesting side impression can be taken from the Fed’s now likely decision to end the Bank Term Funding Facility when it runs to its natural course in March. We think it’s a mistake to end it just now (better to extend for six months), but ending it exudes a sense of Fed comfort on the system. This is important, as if there is no stress to the system, there is no mad need to get a cut in early and run the risk that it's too early. Remember we still have both headline and core CPI rate running with an uncomfortable 3% + handle. The job is almost done, but still not done yet on those measures. So we see the 10yr yield edging net lower, and we’re not surprised by it. But we’d fade the move on a one week view.   Curves bull steepen as markets expected more pushback from the ECB Thursday’s highlight in Europe was the European Central Bank’s monetary policy meeting. The main message was as predicted: unchanged. But an immediate 10bp drop of the 2-year Bund yield suggests that markets expected more pushback between the lines against an early rate cut. Lagarde explicitly standing by her December comments about the possibility of summer cuts was probably enough to feed the doves. And while reiterating the importance of wage growth data, she continued by stating that a rate cut decision would be based on a range of data inputs, including the inflation figures from January and February and the March projections. This comment could have had the dovish interpretation that the ECB can start cutting without April’s wage data if the other price data comes in low enough. Despite the dovish interpretation by markets, our economist maintains the view that rate cuts will have to wait until June. Inflation remains closer to 3% than 2% and geopolitical risks have also become more apparent in the ECB’s assessment. Only a severe recession scenario would warrant earlier cuts. The bull steepening on the back of the press conference could unwind again in coming days as the more hawkish voices of the Governing Council return to the public.   Friday's events and market view Friday’s main data release is the US PCE deflator for December, although the quarterly data provided alongside the GDP release confirmed expectations of a reading in line with the Fed’s 2% target. In the eurozone we will get M3 data as well as the Survey of Professional Forecasters, but the main attention will fall on ECB speakers given the markets' dovish reaction to the press conference. Next to a dovish Panetta, there will also be appearances of the hawks Vujcic and Kazaks.

ECB keeps rates and communication unchanged, discussion of rate cuts premature European Central Bank President Christine Lagarde stressed during the press conference that any discussion on rate cuts was still premature.   At today’s meeting, the European Central Bank kept everything unchanged: both policy rates and communication. The press release with the policy announcements is almost a verbatim copy of the December statement. The ECB only dropped two phrases that could be interpreted as opening the door to rate cuts very softly: the December comments on domestic price pressure being elevated, and the temporary pick-up in inflation. The fact that these two phrases were dropped, however, could also simply be linked to the fact that there are no new forecasts. And during the press conference, ECB President Lagarde mentioned that observers shouldn’t pay too much attention to subtle changes in the text. Admittedly, we don’t know what to do with this comment, bearing in mind that central bankers are normally known for weighing every single word and comma in their communication. Also during the press conference, Lagarde stressed that the Governing Council had concluded that any discussion on rate cuts was currently premature. She repeated the importance of wage developments in the coming months for the next ECB steps, pointing to some indicators that already show some slowing in wage growth. While this could be seen as a very tentative shift towards more dovishness, Lagarde also emphasised the need for inflation to be on a sustainable downward trend. Asked whether she would repeat her statement from last week in Davos that rate cuts by the summer were likely, Lagarde replied that she always stood by what she had said. Even though we today learned that we shouldn’t pay too much attention to every single word, we do remember that Lagarde said in November last year that the ECB wouldn’t cut rates in the next couple of quarters. Combining these two comments would imply that a first rate cut could not come in June but only in July at the earliest. However, past experience has shown that the ECB president is not necessarily the best ECB forecaster.   We stick to our call of a June cut Looking ahead, today’s meeting once again stressed that the ECB is in no position to start cutting rates soon. In any case, even if actual growth continues to turn out weaker than the ECB had expected every single quarter, as long as the eurozone remains in de facto stagnation mode and doesn’t slide into a more severe recession, and as long as the ECB continues to predict a return to potential growth rates one or two quarters later, there is no reason for the ECB to react to more sluggish growth with imminent rate cuts. Also, the job of bringing inflation back to target is not done yet. In the coming months, inflation developments will be determined by two opposing trends: more disinflation and potentially even deflation as a result of weaker demand, but also new inflationary pressures due to less favourable base effects, new inflationary pressure as a result of the tensions in the Suez Canal as well as government interventions in some countries, above all Germany. As long as actual inflation remains closer to 3% than 2%, the ECB will not look into possible rate cuts. It would require a severe recession or a sharp drop in longer-term inflation forecasts to clearly below 2% to see a rate cut in the coming months. We continue to believe that a first rate cut will not come before June.

US GDP confounds slowdown fears, but 'job done' on inflation Fourth-quarter 2023 GDP growth beat all expectations thanks to strong consumer and government spending plus a positive contribution from net trade. First-quarter GDP growth is expected to be weaker based on business surveys, but the Fed is close to declaring victory on inflation with the second consecutive 2% quarterly core inflation reading.   GDP beats all expectations US fourth-quarter GDP growth came in at 3.3% quarter-on-quarter annualised, well above the 2% consensus and above every forecast in the Bloomberg survey. The personal consolation is that at least we were closest (ING predicted 2.5%). The details show consumer spending was very strong, rising 2.8% while government spending increased 3.3% and non-residential fixed investment increased 1.9% with residential investment up 1.1%. Inventories added 0.07 percentage points to growth while net exports added 0.43pp.  This means the economy grew 2.5% for the full year of 2023, confounding expectations at the beginning of last year that tighter monetary policy and credit conditions would potentially lead the economy to fall into recession. That said, a great number today makes it more likely that first-quarter 2024 GDP will be weaker. Inventories are going to be making a negative contribution and trade is likely to also swing back to becoming a headwind while consumer momentum is also slowing somewhat. Investment also looks set to remain subdued based on business surveys. Early days, but we are pencilling in a 1-1.5% figure for the first quarter – the current consensus is for GDP growth of just 0.6%.   US real GDP level versus pre-Covid trend   But Job done on inflation Just to mention that we have confirmation of 'job done' on inflation. The Fed's favoured measure of inflation – the core personal consumer expenditure deflator – has come in at 2% annualised for the second quarter in a row. Tomorrow's monthly data will also likely confirm that the MoM increase has come in below the key 0.17% MoM threshold for the sixth month in seven – that's the run rate we need to hit over 12 months to get us to 2% year-on-year. As such the Fed now has huge scope to cut rates. We just think the Fed will wait a little longer to make sure it is really, really confident it can afford to cut – we expect the first move in May with 150bp of cuts this year. Neutral rates as described by the Fed are 2.5%, suggesting scope for 300bp of rate cuts to merely return us to 'neutral'. For the bond bulls who fear a bumpier, weaker outlook for the economy over the next couple of years, it could be even greater.   Core personal consumer expenditure deflator (QoQ% annualised)

No hints on future direction as ECB keeps everything on hold No changes from the European Central Bank. And the policy statement gives no hints of possible next steps.   The European Central Bank just announced its rate decisions and surprise, surprise, all policy interest rates remain on hold. In the press release, the ECB didn’t give away any new hints on future policy shifts; it's almost a verbatim copy of the December statement. Today’s meeting is mainly an intermediate one, waiting for the bank's next round of economic forecasts in March. If anything, it could give somewhat more guidance about potential next steps. Financial markets have been pricing in the first rate cuts for April. In the inner logic of the ECB’s macro models, these market prices make the need for actual policy rate cuts less urgent. Financing conditions have eased since early December, doing the work actual rate cuts should do: supporting growth but also pushing up inflation risks. Consequently, the more aggressive the market prices future rate cuts, the less needed and likely those cuts will be. As long as actual inflation remains closer to 3% than 2%, the ECB will not look into possible rate cuts. It would require a severe recession or a sharp drop in longer-term inflation forecasts to clearly below 2% to see a rate cut in the coming months. We continue seeing a first rate cut not before the summer. Let’s see whether ECB president Christine Lagarde will add even more flavour to the ECB’s current inflation assessment and discussions about next steps. Don’t forget that at the last meeting in December, the ECB didn’t even discuss rate cuts. The press conference will start at 2.45pm CET.  

Borrowing needs will fall this year, meaning a lower supply of LCY bonds, but there is still a long way to go given the slow fiscal consolidation. Central and Eastern Europe should remain more active in the FX market than pre-Covid, while a busy January and the broadening of funding sources offer flexibility for the rest of the year Borrowing needs this year will be down on last year in the whole CEE region, with the exception of Poland. The decline is due to both lower budget deficits and redemptions. In contrast, in Poland, both have increased year-on-year. Overall, the supply of local currency bonds should fall but remain well above pre-Covid levels. Given lower yields, this supply may prove more difficult to place in the market compared to last year, which saw strong market demand despite record supply. This time is different, and we expect financial markets to be tougher and punish more budget overruns and additional issuance. Local currency issuance: Improvement but still a long way to go From a positioning perspective, we find the Romanian government bond (ROMGBs) market to be overcrowded after the significant inflows last year. On the other hand, the significantly underweight Polish government bond (POLGBs) market should help cover the historically record borrowing needs. Czech government bonds (CZGBs) and Hungarian government bonds (HGBs) remain somewhere in between with steady foreign inflows into the market. On the sovereign ratings side, all the obvious changes happened last year and should stabilise this year with only some adjustments in outlooks in the pipeline, unless a more significant shock arrives. On the local currency supply side, we see a clear improvement from last year in the Czech Republic, as it was a bright spot in the CEE region with credible public finance consolidation. In addition, we see it as the only country in the region with positive risks of a lower supply of CZGBs than the Ministry of Finance indicates. Hungary has also made great progress here, of course, with the traditional broad diversification of funding sources that should keep the pressure off the HGB market in the event of an overshoot of the projected deficit. In contrast, we see only a relatively small improvement in Romania, where the supply of ROMGBs will fall only a little. The supply of Polish government bonds, meanwhile, was already at a record-high last year and is set to rise a little more this year. In addition, the use of additional sources to avoid flooding the local currency bond market will increase significantly, which we believe represents the biggest challenge for the bond market in the CEE region this year.   FX issuance: Fast start and diverse funding sources offer flexibility On the FX side, CEE sovereigns are set to remain active in the Eurobond primary market in 2024 and beyond, with the overall trend driven by recent external shocks from Covid and surging energy prices, along with structural factors such as the energy transition in Europe. A key theme that unites regular issuers Romania, Poland, and Hungary is the diversification of funding sources, with more consistent interest in the US dollar, as well as alternative currencies such as the Japanese yen and Chinese yuan, alongside the more traditional euro for the region. The growing green bond market is also an area of focus, with Hungary leading the way, and Romania set to follow this year. At the same time, 2024 should see some divergence, with Poland taking the lead in the region for Eurobond issuance and set to be one of the largest EM sovereign issuers globally this year. Hungary should see a slight reduction in Eurobond supply compared to recent years, with its strategy of diversifying funding sources and front-loading supply providing plenty of flexibility for the rest of the year. Romania should retain its position as a regular issuer, although net supply will be lower this year, while catching up with Poland and Hungary in terms of diverse funding sources via green issuance and alternative currencies. A strong start to the year, with almost $15bn in issuance for CEE in January so far, should mean less pressure on the region to issue later in the year if market conditions turn.  

The comments of Deputy Governor Virág were deliberate However, on 17 January Deputy Governor Virág spoke at the Euromoney conference in Vienna, and his remarks tilted our rate cut expectations from 75bp to 100bp. He conveyed the message that: “based on the information available, there were as many reasons for a 75bp cut as there were for a 100bp cut at the January meeting”. We believe that these comments are more likely to indicate an increase in the pace of rate cuts, as they were made in the context of weighing the favourable developments in internal factors against unfavourable developments in external factors   Our call Against this backdrop, we see the National Bank of Hungary cutting the base rate by 100bp on 30 January. This could bring the key rate down to 9.75% after the rate-setting meeting, while we expect the Monetary Council to also cut both ends of the rate corridor by 100-100bp. There remains one major factor that poses a downside risk to our call and that is FX stability. We believe that if we were to see a further marked deterioration in EUR/HUF, this would encourage the central bank to remain more cautious and maintain the previous pace of 75bp of easing. However, as the central bank will certainly remain in data-dependency mode, this does not mean that 100bp cuts will be automatic going forward. Rather, we expect the NBH to cautiously assess both internal and external developments and act accordingly on a meeting-by-meeting basis. Our view on the pace of disinflation has not changed, as we expect disinflation to continue forcefully in the first quarter, but then to stall from the second quarter onwards as base effects reverse. This means that, on the basis of current information, we expect the pace of rate cuts to be reduced at the March meeting.   Our market views The Hungarian forint outperformed its CEE peers significantly in the first days of the year with lows below 378 EUR/HUF. However, we turned negative on HUF ahead of the December inflation reading due to significant divergence between FX and rates, which proved to be the right decision. HUF has since weakened by 2% flushing out the long positioning that the market had built in the last two months. Of course, EUR/HUF is one of the main, if not most important, factors influencing the speed of the NBH rate cut.   CEE currencies vs EUR (end 2022 = 100%) For now, we think EUR/HUF levels of 386-387 are still comfortable for the central bank, however, we believe that above 390 the NBH would start to consider a more cautious approach with a hard stop above 395, i.e. only a 75bp rate cut.  We believe the gap between FX and rates that we pointed to earlier has been closed, but positioning and global risk-off sentiment affecting the entire CEE region could push EUR/HUF higher, which would raise the risk to our NBH call   Hungarian yield curve   After a huge rally in rates in the first half of January, the market pressure eased and some bets on rate cuts were taken back. However, the curve continues to steepen with the 2s10s IRS within reach of zero, significantly outperforming CEE peers at the moment. However, if the NBH delivers a 100bp rate cut as we expect, the market will move back to where it was after the December inflation reading and comments from NBH officials. That's why we like getting rates at these levels at the short end of the curve. Looking even better in our view are Hungarian Government Bonds (HGBs) which have also sold off and are not trading far off the IRS curve. So with a very favourable inflation profile for the coming months and the central bank cutting rates, we see good value here once again. Additionally, the supply side of HGBs looks good, with a significant drop in net supply in particular, from last year.  

National Bank of Hungary Preview: Embracing the present Despite a clear deterioration in external risks, we believe that favourable internal developments, accompanied by recent comments from Deputy Governor Barnabás Virág, will tip the balance towards a 100bp cut. However, if the forint continues to weaken markedly, then the previous 75bp pace will likely be maintained.   The decision in December The National Bank of Hungary cut its key interest rate by 75bp to 10.75% in December. At the same time, the central bank has given clear indications that the pace of rate cuts may be increased if internal and external developments allow, as we discussed in our last NBH Review.   The main interest rates (%)   Internal developments strengthen the case for a larger cut Headline inflation fell by 2.4ppt to 5.5% year-on-year (YoY) between November and December, which in fact was a downside surprise compared to our 5.7% forecast. However, what’s more important is that December’s figure was 0.2ppt lower than the central bank’s own estimate, published in the latest Inflation Report. Other measures of price pressures also look favourable, as core inflation decelerated to 7.6% YoY in December, while on a three-month on three-month basis, it was below 3%. At the same time, the National Bank of Hungary's measure of inflation for sticky prices also decreased, displaying a reading of less than 8.7% YoY.   Underlying inflation indicators   The country's external balances are also improving, as the trade balance has been in surplus for 10 months, and even reached an all-time high of EUR 1.7bn in November. As for the current account, we have already seen surpluses in the second and third quarters of 2023, and we expect it to remain in positive territory at the end of 2023.   External developments warrant a cautious approach Let’s start with two of the positive developments regarding external risks: We've already seen a dovish pivot from the Federal Reserve, and we expect the European Central Bank to follow suit at some point. This means that the next move for both central banks will be a cut rather than a hike, which in turn means that the HUF carry will not decline as much going forward as it would have if these central banks were still in rate-hiking mode. Even though rate cut expectations have been slightly dialled down compared to the time of the December NBH meeting, the direction of travel is favourable for emerging market currencies, including the HUF. One of the key uncertainties has been removed with the positive decision of the European Commission on the horizontal enablers (judicial reforms). With Hungary now having access to around EUR 10.2 bn of Cohesion funds, this could increase risk appetite towards Hungary and support market stability. Container freight benchmark rate per 40 foot box (USD)   In our view, there has been one external factor where there has been a clear and marked deterioration, and that is the conflict over the Red Sea. Several shipping companies have already suspended shipments on the Red Sea routes due to the ongoing Houthi attacks, and in our latest note on Hungarian inflation, we’ve also discussed the effects of trade diversion. The impact of the Red Sea conflict on supply chains is already being felt as Suzuki halted the production of the Vitara and S-Cross models at its Esztergom, Hungary plant between 15 and 22 January. The shutdown was caused by delays in the delivery of Japanese engines. With shipping costs rising and supply chain disruptions already evident, we have identified the deterioration in external developments as the dominant factor that would affect the central bank's reaction function.

Banks on the first line of action Changes stemming from the EPBD review will affect both society and financial institutions as these will have to play a major role in financing renovation. The EPBD recast states that financial institutions should be mobilised to incentivise building renovation. Furthermore, MS should encourage banks to promote targeted financial products, grants, and subsidies to improve the energy performance of vulnerable households and owners of the worst-performing building stock. Finally, the Commission is expected to publish a voluntary framework to help financial institutions target and increase lending volumes in energy renovations. The housing market differs a lot between Member States. Hence, the impact of the EPBD recast will also vary depending on the country. It’s important to consider national specificities when addressing the potential effect of the Directive. Before looking into potential effects on banks, six important variables must be considered to estimate the impact of the Directive, these six variables are discussed in more detailed in our previous piece that you can find here.  Firstly, the availability of sufficient and qualitative data on buildings’ energy efficiency varies significantly between jurisdictions. Consequently, investments to generate and update these data points will also fluctuate. Secondly, the current quality of the building stock is also greatly varying, as mentioned previously. This adds to structural differences in building types.  Thirdly, some countries already see the presence of an energy premium on their housing and real estate market. For example, in Belgium, ERA, the country’s largest real estate agent, showed that Flemish homes with an EPC score of A or B became 1.5% more expensive in 2023. In contrast, homes with a lower score (E or F) see a price decline of 1.6% over the same period. Our economists expect these energy efficiency premiums to widen in the coming years. Read more on this here. The generalisation and growing importance of EPCs will, therefore, have an impact on the overall market price. House prices have slightly decreased since 2022 due to the high interest rate environment Index Jan 2011 = 100       Also, as shown in the previous section, renovation costs vary greatly between MS, which ultimately impacts renovation feasibility. This is accentuated by the national ownership profile. Indeed, a higher share of low-income homeowners will also hinder energy renovation, especially in countries with higher refurbishing costs. This brings us to the last point: liquidity access. The feasibility of the EU renovation wave will depend on homeowner’s access to sufficient liquidity to fund the necessary refurbishing. Ultimately, this last variable pushes banks to the first line to enact this transition. Nonetheless, this is not without consequences for the financial sector. Overall, the changes presented in the transitional agreement could negatively affect the banking sector through two channels. The first one is the enforcement of the Minimum Energy Performance of buildings. Setting a minimum required energy performance or EPC could reduce the value of the least efficient part of the bank’s portfolio. Indeed, as presented before, some countries like Belgium have already highlighted an energy premium on high EPC houses and discounts on the worst-performing stock. However, as the provisional agreement applies MEPS only to non-residential buildings and focuses on an average efficiency approach for residential ones, we expect this effect to be less important than projected previously.   The provisional agreement did, however, keep the option for MS to exclude certain types of buildings from energy efficiency requirements. While this makes sense to protect the integrity of historical buildings, it may provoke a large devaluation of some buildings with the presence of energy efficiency premiums on the market. Hence, depending on a bank's portfolio composition, it could imply higher stranded asset risk for institutions with a large share of EPBD-excluded buildings on their book. The EPBD recast is also expected to impact banks as they will have to create and develop an EPC database for their portfolio. The cost of retrieving sufficient and qualitative data on building efficiency remains one of the main challenges for the sector. Without qualitative information on the state of credit institution’s building stock, it also hinders the enforcement of adequate measures and financial incentives for renovation. On the bright side, this Directive recast will open and help develop a new market for renovation loans by setting a clearer direction for the sustainable transition. As the regulation outline becomes clearer, financial institutions can estimate and prepare for the upcoming renovation wave. With the renovation wave also comes the opportunity for financial institutions to develop products allowing all homeowners to access the necessary financial means and take a concrete role in making this transition a just one. Even if the Directive review doesn’t state direct penalties for infringements, not respecting or playing an active role in the enforcement of the new requirements can have a serious reputational effect as well as increasing litigation risks for banks.   The provisional agreement reached at the end of 2023 brings the Energy Performance of Buildings Directive a step closer to the finish line. The most important change concerns residential buildings' renovation goals. Indeed, as the proposals all included a minimum energy performance approach, the agreed text changes this to rather look at improving national averages while keeping the MEPs for non-residential buildings. The clause ensuring that 55% of the energy reduction stems from the worst energy-performing buildings is the main addition to the existing proposals. The EPC scale harmonisation will ensure more comparability between countries building stock, however this harmonisation will be delayed to the end of 2029 for some countries. The agreement underscores stricter regulation on fossil fuels, including their gradual phasing out, but also more lenient rules on the establishment of solar energy for buildings. All in all, changes stemming from the EPBD recast will affect both society and financial institutions, as these will have to play a major role in financing renovations.

National Building Renovation Plans To ensure that MS reach the emission reduction targets, national Building Renovation Plans will be enforced. These must, on the one hand, have a stronger focus on financing the renovation and, on the other hand, ensure the availability of skilled workers to proceed with the sustainable renovations. Thus, member states are expected to share an outline of financial measures, investment needs and administrative resources to reach their national renovation milestones. Alongside their Building Renovation Plans, MS will have to set up building renovation passport schemes. These documents will provide tailored roadmaps for the renovation of specific buildings in several steps to significantly improve energy performance. It would give the opportunity to clearly map, through expert certifications, what can be done to improve the energy performance of a specific building. The creation of one-stop shops (OSS) is one of the mandatory indicators included in the template of the national Building Renovation Plans. These suppliers provide “integrated solutions” as services and assistance in multiple steps of an energy renovation, helping with the facilitation and/or coordination of renovation work. For buildings with an EPC label below C, MS will be required to invite owners to an OSS to receive renovation advice either immediately after the EPC expires or five years after the issuance of the performance certificate. A report from the European Commission (2021) finds that these OSS solutions could incentivise between 5% and 6% of the renovation volume desired by the renovation wave in 2030. Energy topics The EPBD recast will also include articles to gradually phase out fossil fuel boilers. Indeed, as of January 2025, subsidies for stand-alone fossil fuel boilers will be banned. Alongside will also come a legal basis for MS to implement regulation on heat generators. The EU wants to completely phase out boilers powered by fossil fuels by 2040. The agreement also states that MS must ensure that new buildings are solar-ready. In other words, that they are fit to host rooftop photovoltaic or solar thermal installations. This should be the case where it is technically, economically and functionally feasible for new public and non-residential buildings over 250m2 as of December 2026. All existing public buildings (over 2000m2) as of the end of 2027, all of those over 750m2 as of December 2028 and finally, all public buildings over 250m2 as of December 2030.

Energy Performance Criteria One of the most contingent points in the EPBD is harmonising the Energy Performance Criteria (EPC). Indeed, the current labelling system significantly varies across countries. These differences make it very difficult for the Union to set harmonised minimum energy performance goals. It also hinders the building stock comparison between Member States.   The current EPC labelling significantly hinders comparison between countries This is even the case between regions as in Belgium with three different scales   The provisional agreement states that EPCs shall be based on the common EU template with common criteria. The scale shall be between letters A and G, with A corresponding to zero-emission buildings and G to the worst-performing building of the national building stock at the time of enforcement. Classes B to F must have an appropriate distribution of energy performance indicators among each class.   Zero-emission buildings are defined as buildings with a very high energy performance, requiring zero or a very low amount of energy, producing zero on-site carbon emissions from fossil fuels and producing zero or a very low amount of operational greenhouse gas emissions. Nearly zero-energy buildings are defined as buildings with a very high energy performance which cannot be lower than the 2023 cost-optimal level reported by MS and where the nearly zero or very low amount of energy required is covered to a very significant extent by energy from renewable sources, including energy from renewable sources produces on-site or nearby.   MS that already implemented A0 as a zero-emission building may keep this designation instead of A. Furthermore, MS that have rescaled their EPC classes on or after January 2019 and before the enforcement of the EPBD IV may postpone the rescaling of their EPC until December 2029. The review also specifies that financing measures should be enforced to incentivise the renovation. Those should specifically target vulnerable homeowners and worst-performing buildings in order to mitigate energy poverty. It also underlines safeguards for tenants, reducing eviction risks and disproportionate rent increases at MS level    

A step closer to the finish line The European Commission's legislative proposal to revise the EPBD was adopted in December 2021. Since then, the Council of the EU and European Parliament also drafted their own proposals. Each institution proposed a slightly different approach to reach the European objective and enact the transition. In our previous pieces “Energy Performance of Building Directive review: Major renovations ahead” and “Energy Performance of Building Directive review: how will banks be affected?” we looked into both the Commission’s and the Council’s proposals and their expected impacts on the banking sector. After months of Trilogue negotiations, a provisional agreement was reached on 7 December, 2023. The Trilogue sessions aimed to develop a common text reviewing the current EPBD. The last step of the legislative process will be for the European Parliament and Council to vote on the provisional agreement to formally endorse it. If the vote is successful, the policy should be enforced in 2025   Four main changes to the current EPBD This section dives into the main changes the recast makes to the EPBD and how that diverges from the previous policy versions.   Renovation goals Starting with residential buildings, the provisional agreement states that each Member State (MS) will adopt their own national trajectory to reduce its building stock’s average primary energy use. This should be in line with the 2030, 2040, and 2050 targets contained in the MS building renovation plan and should identify the number of buildings, building units, and floor areas to be renovated annually. This is a significant change from the previously proposed policies as these were including renovation targets based on minimum energy performance criteria. Instead, the agreement focuses on diminishing energy consumption across all houses rather than only the worst-performing buildings. The agreement states that the reduction in average primary energy use should be 16% by 2030 and 20-22% by 2035 relative to 2020 levels. MS must reach these reduction targets but are free to choose which buildings to target as well as which political measures to enforce (i.e., minimum energy performance standards, technical assistance, and financial support measures). However, to ensure that the Union’s worst-performing buildings are gradually refurbished, the EPBD review specifies that at least 55% of the decrease in average primary energy use should stem from the renovation of the worst-performing buildings nationally. Worst-performing buildings are defined as buildings which are within the 43% of buildings with the lowest energy performance in the national building stock.   Moving to non-residential buildings, the agreement keeps the reduction target as proposed before the negotiations. Non-residential buildings will, therefore, need to follow Minimum Energy Performance Standards (MEPS) set by Member States. This gradual improvement should lead to the renovation of at least 16% of the worst-performing buildings by 2030 and 26% of those by 2033. Member States will be able to express this threshold in either primary or final energy use. In the case of a seriously damaging natural disaster, a Member State may temporarily adjust the maximum energy performance threshold so that the renovation of the damaged non-residential buildings replaces the renovation of other worse-performing buildings. This should, however, be done whilst ensuring that the percentage of stock undergoing renovation remains stable.   Additionally, all new residential and non-residential buildings will have to have zero on-site emission of fossil fuels as of January 2030 and January 2028 for publicly owned buildings. MS will, nonetheless, be able to exempt certain categories of buildings from the previously explained requirements. For non-residential buildings, they should communicate the criteria for such exemption in the National building renovation plan and compensate the exempted stock with renovation in equivalent improvement elsewhere in their non-residential building stock.

VEKA estimates that renovation costs of inefficient buildings vary between €15,000 and €100,000. Nonetheless, important national variations exist. In Germany and the Netherlands, the average renovation costs lie between €15,000 and €30,000, and Belgian homeowners face higher costs with, on average, €50,000. Also, research from our economists shows that renovation costs have increased faster than inflation. Despite that, renovations represent a significant share of the building industry in the Union. The study also highlights that Western European countries have a higher share of renovation out of their total building production.   Renovations represent a significant share of building industry despite costs increasing faster than inflation   The second variable to consider is the ownership profile. Just as for the renovation costs, ownership varies across the EU. However, it’s a crucial point in the discussion as it determines the feasibility of energy renovation. Indeed, significant differences persist between EU jurisdictions. For instance, Belgium shows not only a high rate of ownership but also a high rate of low-income ownership, with 44% of the lower-income population owning property. This share is only 20% and 15% for Germany and the Netherlands, respectively. Countries with an important share of low-income homeowners can expect more difficulties in improving the national renovation rates as access to liquidity is more complex for this part of the population.   Home ownership rate varies across countries as well as homeowners' profile   Financial institutions are directly affected by the renovation wave as most households will need a loan to make the necessary changes. Furthermore, the sector faces increased devaluation risks through the existence of energy premia. We'll be looking at that shortly.  All in all, the Energy Performance of Building Directive combines financial, social and technical aspects, making it a significant challenge for the EU to reach its GHG emission reduction goals.      

Agriculture– Coffee quality premium shrinks The spread between Robusta and higher-quality Arabica coffee tightened to around US¢40/lb yesterday as Robusta prices soared to new highs – the premium reached a recent high of around US¢80/lb in December 2023. Robusta coffee’s active contract jumped to an all-time high of US$3,250/t yesterday at one point as supply disruptions from Vietnam and Brazil added to the supply tightness. The soaring prices have pushed farmers to hold onto the existing inventory in hopes of even higher prices, creating supply-demand imbalances. Moreover, the ongoing conflict around the Red Sea route makes it more challenging for Vietnamese coffee to reach the US and Europe.

Energy – The EIA reports a tight crude oil market Crude oil prices recovered yesterday and have been trading on a  firmer note this Thursday on a constructive report from the EIA on US crude oil inventory. The ongoing tensions in the Middle East, combined with positive economic data, further helped oil prices to trade higher. ICE Brent has been trading comfortably above US$80/bbl today, while NYMEX WTI also inched up to US$75.5/bbl. Brent-WTI spread has narrowed to US$4.9/bbl currently compared to a high of around US$5.8/bbl last week as the cold wave in the US tightens supplies in the US market. The weekly report from the Energy Information Administration shows that the US crude oil inventory dropped by a huge 9.2MMbbls over the last week. The withdrawals are significantly higher than the 6.7MMbbls of withdrawal that API reported or the market expectations of around 0.9MMbbls/d of withdrawal. Crude oil inventory at Cushing, Oklahoma, dropped by around 2MMbbls over the week. Crude oil imports into the country dropped by around 1.8MMbbls/d over the week, which helped to tighten the supplies. Refinery operating rates in the country dropped sharply by 7.1% over the week to 85.5% as of 19 January as the cold snap pushed a large part of the refining capacity to close temporarily. Gasoline inventory increased by around 4.9MMbbls over the last week, while distillate inventory was down 1.4MMbbls. The market expected inventory build-up of gasoline and distillate at around 1.4MMbbls and 0.6MMbbls, respectively. European gas prices increased yesterday as Qatar delayed some of the LNG deliveries into the region due to ongoing conflict around the Red Sea trade route. The longer route around the Cape of Good Hope adds around ten days of transport time for the LNG cargoes, which has pushed up gas prices in the immediate term. That said, total LNG supplies remain largely unaffected for now, and exports from Qatar remain at a healthy pace.

The Commodities Feed: Gold trades softer on lower rate cut expectations Gold is softer this Thursday as stronger economic data and positive sentiment in the broader financial markets have eased Fed rate cut expectations for the March meeting. Meanwhile, a stronger EIA report pushed ICE Brent above US$80/bbl.   Metals – Gold trades softer Gold has been trading lower as the prospect of a rate cut in March eased amid positive economic data and overall sentiment in the broader financial markets. The US composite PMI advanced to 52.3 in January, the highest level since June 2023, as service sectors show a rebound. The eurozone composite PMI also increased from 47.6 to 47.9 in January, indicating early signs of bottoming out, although it still remains in the contraction zone. The positive economic data hints that the US Fed may opt to wait before cutting rates, which weighed on gold demand. Investment demand for gold remains soft, with total known ETF holdings of gold falling by around 1.3mOz in the month so far to a total of 84.3mOz as of 24 January, the lowest level in nearly four years.

esla set to skid after missing on revenues and profits By Michael Hewson (Chief Market Analyst at CMC Markets UK)   Having found itself caught up in the big Nasdaq 100 sell off in 2022 as its share price fell from peaks of $400 to as low as $102 in 2022 the Tesla share price managed to rebound to just shy of $300 in the summer of 2023, before establishing a short-term base just above $190 a share in October last year. Since posting those lows in the wake of its Q3 numbers back in October the Tesla share price has chopped sideways as investors mull the prospect of whether we've seen peak Tesla when it comes to EV growth and profitability.   Wherever you look there are signs of EV fatigue as Tesla's first mover advantage starts to wane, and the costs of owning an electric vehicle start to become apparent to all but the most affluent buyers. Rising insurance costs relative to ICE cars, as well as higher repair costs mean that while running costs might be cheaper on a day-to-day basis, the financial barriers to owning an electric car are still high, while the same concerns about range anxiety remain. While Musk is acutely aware of this given that he has indicated that he wants to look at producing a cheaper model at the company's Austin factory, the market is also aware that the days of big margins on EV sales are very much in the rear-view mirror.   A year ago, when Tesla CEO Elon Musk outlined his sales target for the whole of 2023 the ambition was to push total sales to as many as 2m vehicles, which at the time seemed eminently feasible. Increasing competition along with supply chain disruptions made that task harder and while it should meet that target in the upcoming fiscal year, having sold 1.8m in 2023 the days of big margins appear to be long gone.   We still saw total revenues rise to a record $25.17bn in Q4, a 3% increase year on year, however this was short of forecasts of $25.9bn, with annual revenues coming in at $96.7bn. Profits were also below expectations coming in at 71c a share, pushing the shares sharply lower in afterhours trading, towards the lows we saw back in October.  The problem for Tesla is any significant attempt to boost sales and revenues from here on in will probably need to be achieved at the cost of further falls in operating margin, due to having to compete with BYD in China, one of its biggest markets, as well as increased competition elsewhere.   We've already seen the evidence for this over the past few months which has seen Tesla cut prices sharply across all its markets dragging operating margins down from 16% a year ago to 8.2%, while operating expenses have also gone by 27% to $2.37bn.   On an annual basis operating expenses rose to $8.77bn from $7.2bn while automotive gross margin fell from 28.5% to 18.2%. Total automotive revenues rose 15% in 2023, however the main growth area came from Tesla's energy generation business which saw revenues rise 54% to $6bn, while services grew 37% to $8.32bn. Energy generation will be a key area of revenue growth as electric vehicles become more mainstream with pay per use supercharging points likely to help drive profits going forward, with the company looking to ramp up its charging infrastructure.   Deliveries of the first batch of the Cybertruck also began during Q4 from its Austin facility in Texas, with the initial aim of 125,000 capacity. As we look ahead to the upcoming quarter and the new fiscal year Musk came across as particularly downbeat, declining to offer any specific full year targets, although Tesla did project that automotive volume growth was likely to be lower than 2023, and that the outlook for revenue in energy storage is expected to be better.

German Ifo index drops to its lowest level since 2020 Pessimism is now fully back in Germany as new supply chain disruptions and a train drivers' strike increase the risk of yet another quarter with a contracting economy.   Pessimism strikes back in Germany as the country's most prominent leading indicator just dropped to the lowest level since the summer of 2020. In January, the Ifo index came in at 85.2, down from 86.3 in December. The tentative revival of optimism last autumn has turned out to be very short-lived and the index has now dropped for the second month in a row. Both the current assessment and the expectations component weakened in January.   New year and two new problems It sometimes feels as someone in Germany must have smashed a mirror, causing seven years of bad luck. As if the last four years of pandemic, war in Ukraine, supply chain frictions, energy crisis and structural shortcomings weren’t enough, 2024 has not started any better. On the contrary, the new year brought new problems for the German economy: there are the government’s austerity measures but also ongoing strikes by train drivers and supply chain disruptions as a result of the military conflict in the Red Sea. In fact, another contraction of the German economy in the first quarter of the year looks even more likely. Looking beyond the near term, we expect the current state of stagnation and shallow recession to continue. The risk that 2024 will be another year of recession is high. We expect the German economy to shrink by 0.3% YoY this year. It would be the first time since the early 2000s that Germany has gone through a two-year recession, even though it could be a shallow one.

CEE: FX looking for hard ground The calendar in the region is basically empty today but it seems that financial markets can find their own entertainment without it. CEE assets continue in higher volatility mode. After Tuesday's sell-off, Local currencies found some ground yesterday. From our perspective, we continue to see the Czech koruna as the most stable in this risk-off environment. Positioning was already short before the sell-off and the CZK seems to be firmly anchored to rates, which are not going anywhere for now thanks to the CNB's cautious approach. Therefore, we continue to see the 24.700-800 range as an anchor for EUR/CZK. Poland's zloty remains the only currency supported by higher market rates, improving the interest rate differential. On the other hand, market positioning here supports more selling pressure. Moreover, the political situation has only temporarily calmed down, in our view, and we are likely to see more noise in the near term. Therefore, we expect to see 4.400 EUR/PLN levels again soon -  rather next week than this. However, the key now will be mainly EUR/HUF, which is moving up fast ahead of next week's National Bank of Hungary meeting. We expect a 100bp cut on Tuesday but a still-weak forint is the risk to our call. We see 390 as a pain threshold where NBH will start to be more cautious and 395 as a hard stop for a 100bp rate cut and switch to the previous 75bp pace. We turned negative on HUF before the start of this sell-off due to FX and rate divergence, discussed here earlier. But now we believe this gap has closed in the last few days and the pressure on HUF should stop. However, the risk-off sentiment and long positioning is a clear risk here, which may further threaten the forint.

EUR: Lagarde will try to hold the data dependency line As Francesco Pesole discusses in our ECB Cheat Sheet, President Christine Lagarde will try to avoid being drawn into any pre-commitment over a summer rate cut. In theory then, if she can avoid this and leave markets with a sense that the European Central Bank is truly data-dependent, short-term euro interest rates could nudge a little higher and support FX pairs like EUR/USD and EUR/CHF. For reference, the market still prices 17bp of ECB rate cuts for the 17 April meeting, whereas our team only sees the easing cycle starting in June once the ECB has a better understanding of the spring wage round. We would say that the ECB event risk (statement 14:15CET, press conference 14:45CET) proves a mild upside risk to EUR/USD - but the carpet could be pulled from under the euro should President Lagarde somehow convey the message that the policy rate will be getting cut in the summer after all. 1.0850-1.0950 looks the EUR/USD range, with outside risk to 1.0980/90 should the ECB pushback against easing expectations prove surprisingly effective. Elsewhere Norges Bank announces rates today. The policy rate was hiked to 4.50% in December - so it would seem far too soon for Norges Bank to embrace any idea of easing. However, the Norwegian krone has been suffering a little this year as the backup in market interest rates has hit the risk environment. In all, we suspect EUR/NOK needs to trade a little longer in this 11.35-45 range.

FX Daily: Fed cancels the free lunch European FX markets will today be monitoring how US asset markets react to the news that the Fed will not be renewing its Bank Term Funding Program. US regional banks will be in focus here. Elsewhere, the focus will be on what should be a decent 4Q23 US GDP figure and central bank meetings in the eurozone, Norway, Turkey and South Africa.   USD: Let's see how the US regional banks do today FX markets continue in their slightly risk-averse mode, where some of the investors' favourite high-yield currencies - such as the Mexican peso and the Hungarian forint - remain under some pressure.  This is despite global equity markets doing reasonably well. In short, we continue to see a very mixed investment environment and one in which conviction views can be dangerous. Looking ahead today, there are two US themes to focus on. The first is the Federal Reserve's announcement last night that its Bank Term Funding Program (BTFP) would end as scheduled on 11 March. And effective immediately, banks will be charged the rate paid on Fed reserve balances (around 5.40%) rather than the prior one-year USD OIS +10 bp (around 4.88%) to borrow money from the facility. This cancels the free lunch of banks borrowing at the BTFP and parking it at the Fed. The question is how US regional bank equity prices react to this news today. We presume that the Fed has a good handle on this such that these regional banks do not come under stress again. But let's see how this group trades today and whether it ushers in a new, potentially risk-off tone in US markets. The second focus is the 4Q23 US GDP data. We are looking at an above-consensus 2.5% quarter-on-quarter annualised figure. Consensus is now 2.0%. In theory that should be dollar-positive, but not necessarily risk-negative because the price data is far more important to the Fed right now. On that topic, Friday sees the December core PCE deflator (expected at a subdued 02.% month-on-month), while 13 February remains a major day for calendars in the release of the January CPI figure and the 2023 annual CPI revisions. Given also the event risk of the US quarterly refunding on Monday as well as the CPI release on 11 February, we doubt investors will want to commit much capital just yet. Instead, then, we think rangebound trading is the order of the day, with little follow-through should the dollar look particularly bid or offered. 102.75-103.75 looks the near-term DXY range.

Asia Morning Bites The PBoC announced a larger-then-expected required reserve rate (RRR) reduction late Wednesday. South Korea reported stronger-than-expected GDP numbers today.   Global Macro and Markets Global markets:  The upcoming cut in China’s reserve requirement ratio (RRR) gave Chinese markets some much-needed support. USDCNY has dropped back to 7.1580 and the Hang Seng index rose 3.56% while the CSI 300 gained 1.4%. US stocks were more muted, and the S&P 500 was virtually unchanged despite opening higher - flagging in the latter part of the session. The NASDAQ eked out a 0.36% gain. US Treasury yields rose yesterday, despite the lack of much macro news as the 5Y auction tailed badly. 2Y yields rose 5bp to 4.38% and the 10Y rose a similar amount to 4.176% as the March rate cut hypothesis got priced out further. There is still a bit more room for this to run, according to our rates strategists, though the March cut is now only 36.4% priced in. A US refunding announcement on Monday could also push yields up a bit more. EURUSD rose back up to 1.0883 despite the moves in bond yields. The AUD rose strongly yesterday, pushing above 0.6620 but couldn’t hold on to its gains and dropped back to 0.6577. Cable did better and is up to 1.2719 now, and the JPY has also held on to most of yesterday’s gains and is down to 147.55. In the rest of Asia, the SGD and KRW were both boosted by the CNY moves, though the IDR lost almost half a per cent, rising to 15710. Moves elsewhere were modest. G-7 macro:  The G-7 calendar is a lot more exciting today after a very quiet day yesterday. The ECB is meeting, and while they will not cut rates today, the press conference will as ever be scrutinised for hints as to the timing of the first cut. Later on, the US releases its advance estimate for 4Q23 GDP, which, on an annualized basis is expected to slow from 4.9% in 3Q23 to 2.0%. Weekly jobless claims round off the day’s macro releases. China: The PBOC announced that it will cut the Required Reserve rate (RRR) by 50bp from Feb 5, after which the RRR for large institutions will drop from 10.5% to 10%, and the weighted average RRR will drop from 7.4% to around 7%. The 50bp RRR cut was larger than the 25bp cuts that the PBOC elected for in 2022-2023, and was the largest RRR cut since Dec 2021. The RRR cut will in theory provide around RMB 1tn of liquidity to markets. Furthermore, the PBOC also broadened access for property developers to commercial loans by allowing for bank loans pledged against developers’ commercial properties to be used to repay other loans and bonds until the end of the year. It also cut the refinancing and rediscount rates for rural and micro-loans by 0.25 ppt to 1.75%. We expect a relatively limited positive impact on the economy from the RRR cut and supplementary measures. There remains a question of whether there is sufficient high-quality loan demand to fully benefit from this theoretical liquidity injection; we saw that new RMB loans were down -10.6%YoY in 4Q23 despite the previous RRR cut in September 2023. With that said the size and timing of the RRR cut will contribute toward market stabilisation efforts. Overall, the announced RRR cut was mostly in line with our expectations, although the size of the cut surprised on the upside, and the timing of the announcement was a little unexpected given the PBOC left interest rates unchanged in January. Moving forward, we see room for an interest rate cut to come in the next few months as well. The base case is for a conservative 10bp rate cut, but the larger-than-expected RRR cut does flag a possibility for a slightly larger rate cut as well.  South Korea: Korea’s GDP expanded 0.6% QoQ sa in 4Q23 (vs 0.6% in 3Q23, market consensus). 4Q23 GDP was somewhat higher than the monthly activity data had suggested. The difference mainly came from a gain in private consumption (0.2%). According to the BoK, residents overseas spending increased, more than offsetting the decline in domestic goods consumption. Other expenditure items mostly met expectations. Exports (2.6%) grew solidly thanks to strong global demand for semiconductors, while construction – both residential and civil engineering- plunged (-4.2%), dragging down overall growth.  We expect the trend of improving exports vs softening domestic demand to continue at least for the first half of the year. In a separate report, BoK’s business survey outcomes support our view. Manufacturing outlook improved for a third month (71 in January vs 69 in December) while non-manufacturing stayed flat at 68.   The GDP path will vary depending on how well global semiconductor demand will be maintained and how well Korea’s construction soft-landing will go. We expect exports to improve further at least for the first half of the year. Yet, GDP in the first and second quarters is expected to decelerate (0.4% and 0.3% QoQ sa respectively) from last quarter as sluggish domestic demand weighs more on overall growth.  Today’s outcomes will give the Bank of Korea some breathing room to maintain its current hawkish stance. We pencilled in one rate cut in May, under the assumption of a slowdown of GDP and inflation in 1Q24, but if the construction sector restructuring carries out more smoothly, then the BoK’s first rate cut may come in early 3Q24.   What to look out for: South Korea GDP South Korea GDP (25 January) Japan department store sales (25 January) ECB policy meeting (25 January) US GDP, durable goods orders, initial jobless claims, new home sales (25 January) Japan Tokyo CPI inflation (26 January) Philippines trade (26 January) Singapore industrial production (26 January) US PCE deflator, pending home sales and personal spending (26 January)

Rates Spark: Tame inflation still not enough to trigger a March rate cut US 5yr auction was rough, but Thursday's core PCE should be tame – what then? Likely yields lower, but only temporarily. The ECB takes centre stage with Lagarde anticipated to push back against early rate cut pricing. That may just mean staying away from speculating on timing entirely. What could be a bear flattening impetus if Lagarde disappoints markets.   US 5yr auction was rough, but Thursday's core PCE should be tame – what then? The US 5yr auction tailed, badly. By 2bp (so, it was done at 2bp above subsequent market levels, with a slight lag). The indirect bid (includes central banks) was decent, if not spectacular. The 5yr area is rich to the curve, by some 20bp to an interpolated line between the 2yr and 10yr yields, mostly reflecting a notable inversion along the 2/5yr segment. Still, this is a bit of a disappointment following yesterday's decent 2yr auction. It's also a bit of a reminder of the refunding announcement due on Monday, which is likely to be heavy, with only some morphing of issuance away from longer dates there to take some of the heat away. And we have 7's tomorrow. Should really do better than 5's did, as at least it's higher yielding. Market reaction to the 5yr has been to nudge yields higher. They have been on the turn anyway, post the brief break back below 4% for the 10yr Wednesday morning, and some reasonable ISM data. The 10yr yield moved back up above 4.15%. We still think it gets to the 4.25% area as the March rate cut expectation continues to unwind itself. But Thursday is a day that brings the biggest excuse for yields to test the downside. Our view is if core PCE comes in as expected, it deserves to be met with some downside to yields, as it validates a good reading (2% inflation). But it needs to be better than expected to negate our underlying tactically bearish view. If not, we re-drift higher subsequently, even if that has to wait till next week.   ECB pushback against front-end pricing anticipated The European Central Bank is the key event for European rates markets this week. No one sees a change of policies this time around, so the focus will be entirely on the communication surrounding the eventual turn of the interest rate cycle.   With regards to the expectations of first rate cuts, pricing has moderated a little from the end of last week with the implied probability of a first cut by April now around 70% compared to around 80%. In our view that still looks elevated and is something that most analysts also expect that the ECB will push back against in the press conference. At the same time market pricing for total easing this year hasn't changed that much with still slightly more than 130bp being discounted. Last week the ECB had diminished the impact of its pushback against early pricing by starting to bring up the topic of potential rate cuts in summer. Of course, all these comments came with the large caveats attached pointing to the general data dependency, which the markets seem to conveniently overlook. The outcome of wage negotiations especially still ranks high on things to monitor for ECB officials to make sure inflation will return to target. Just yesterday the eurozone PMIs also showed that price pressures in the services sector were firm and on the rise again.   President Lagarde could reiterate that aggressive pricing of early cuts can have the counter-effect of making them less likely as financial conditions are effectively eased. Keep in mind, the ECB’s December forecasts were based on market rates with a cut-off of 23 November. At that point the December 2024 ECB OIS forward was trading with an implied rate of 3.2% versus 2.6% currently. One effective way to push back against early market pricing would be for the ECB to not even delve into any speculation on when first rate cuts will happen. Markets would not get the confirmation they are looking for and probably pare some of their early pricing further, posing the risk of a bear flattening impact on the curve as a whole. However, we cannot guarantee that in the wake of the ECB meeting officials will stick to this script once they are allowed to talk freely again.   Markets are still seeing good chances for earlier ECB cuts   Thursday's events and market view There will be data to watch such as the German Ifo, but it is clearly the ECB meeting that takes centre stage for EUR rates on Thursday, posing upside risks especially to front-end rates. But shortly before President Lagarde starts the press conference, the US will also release the first reading of its fourth quarter GDP data, including a quarterly core PCE rate likely at the Fed’s 2% again. That may confirm the markets' benign inflation outlook, but at the same time the macro back drop is looking more upbeat as indicated also by the US PMIs yesterday. Other data coming out at the same time are the durable goods orders as well as the initial jobless claims. The latter had surprised by dipping below 200k last week. Thursday’s primary markets will have Italy selling shorter dated bonds as well as inflation linked bonds. The US Treasury will sell new 7Y notes.

Canada edges towards a rate cut in the second quarter Subtle dovish shifts in the Bank of Canada’s thinking and a weak growth backdrop give us increasing confidence that inflation concerns will fade and the BoC will cut rates in 2Q. There may be room for a rebound in short-term CAD rates in the near term though, and USD/CAD could stabilise, but the loonie remains less attractive than the likes of NOK and AUD.   Dovish hints point to cuts The Bank of Canada left monetary policy unchanged at today’s meeting. The target for the overnight rate remains at 5% and the Bank is continuing with quantitative tightening. The market has latched onto the mildly dovish shift in the BoC’s stance with Governor Macklem stating that “there was a clear consensus to maintain our policy at 5%” with the deliberations “shifting from whether monetary policy is restrictive enough to how long to maintain the current restrictive stance”. In this regard the Bank has taken the significant step of removing the line that the Bank “remains prepared to raise the policy rate further if needed” from the accompanying statement. Nonetheless, the Bank remains concerned about the inflation backdrop. It doesn’t expect annual CPI to return to the 2% target until 2025 given “core measures of inflation are not showing sustained declines”, not helped by wages rising 4-5%. That said, there was acknowledgement that the economy “has stalled” with the economy likely stagnating in 1Q 2024. The BoC remains hopeful that it will recover from mid-2024, but the latest BoC Business Outlook Survey reported softening demand and “less favourable business conditions” in the fourth quarter with high interest rates having “negatively impacted a majority of firms”, leading to “most firms” not planning to “add new staff”.  Jobs growth does appear to be cooling and remember, too, that Canadian mortgage rates will continue to ratchet higher for an increasing number of borrowers as their mortgage rates reset after their fixed period ends. In our view this will intensify the financial pressure on households, dampening both consumer spending and inflationary pressures. Unemployment is also expected to rise given the slowdown in job creation and high immigration and population growth rates. Given this backdrop we expect Canadian headline inflation to slow to 2.7% in 1Q and get down to 2% in the second quarter, well ahead of what the BoC expects. Consequently we see scope for the BoC to cut rates by 25bp at every meeting from April onwards (the market is pricing this as a 50:50 call right now). This means 150bp of interest rate cuts versus the consensus prediction and market pricing of 100bp of policy easing. CAD remains less attractive than other commodity currencies The Canadian dollar has weakened following the BoC the announcement, although 2-year CAD yields did not move much after having dropped 10bp to 4.0% since yesterday’s peak on the back of global factors. There may be some room for CAD short-term rates to tick back higher in the near term though, mostly following USD rates. From an FX perspective, it’s key to remember that CAD has been tracking quite closely the dynamics in US data, and that may remain the case until a broader USD decline emerges and favours pro-cyclical currencies such as CAD. We target a move in USD/CAD below 1.30 in the second half of the year, but still see CAD as less attractive than other pro-cyclical currencies like NOK and AUD this year - also due to our expectations for large rate cuts in Canada.

However, while interest rates on corporate loans do not differ significantly across eurozone countries, interest rates on mortgages do. In countries with more variable mortgage rates, average mortgage rates have increased almost in tandem with the rates for new loans. In the Netherlands and Germany, where fixed-rate mortgages are the norm, average mortgage rates have so far barely increased. In the Netherlands, they’ve gone up from 2.3 to 2.5%, while in France, they increased from 0.8 to 4%. The impact of higher mortgage burdens could play out through adjustments in the housing market – transactions are already way down in Spain by 15% year-on-year in November, as we also discuss in this more detailed piece on the Spanish housing market. They could also result in weakened consumption as they reduce the opportunity for disposable spending elsewhere.  And there is another transmission channel through which higher mortgage rates will affect economies: redemptions on mortgage loans have increased markedly in Italy and Spain since higher rates have kicked in. This essentially means that higher rates have kicked off a process of household deleveraging in the south, which will weigh on consumption and economic activity.   Average mortgage rates have risen far faster in southern eurozone markets and France The differences also hold when looking at how debt burdens are developing. So far, the impact has been small, but differences between countries are visible when looking at government, non-financial corporate and household interest payment developments. When looking at net interest rate payments for corporates, we see that German and Dutch companies have yet to see any impact so far. This could also be because they hold more cash reserves, which have started to generate positive interest flows. In Spain, Italy and France, net interest payments have risen to the highest level in more than seven years   Net interest rate payments for corporates are increasing faster in the periphery and France   For governments, the same holds true. While most countries have lengthened the average maturity on their debt, higher rates are starting to result in higher interest payments. We note that the increase has been fastest in Italy, where net interest rate payments have returned to 2015 levels. France has also seen a jump, but at much lower levels, while Spain has so far managed to stave off a runup in interest rate payments. Overall, expect the gap to widen as more debt gets rolled over. This will cause discussions about austerity to become more pressing. Then again, at this point, it is clearly Germany that leads the way in terms of belt-tightening, so we don’t see austerity efforts moving along the traditional north-south lines in 2024.   The impact of tightening on the periphery now looks worse than for the north Even if ECB rates have peaked, and we might even see rate cuts later this year, 2024 will still be one where the full impact of monetary policy tightening of the last 18 months will unfold. While southern eurozone countries surprisingly seemed to defy the adverse impact of monetary policy tightening last year, we fear we'll not see something similar in  2024.

Southern Europe to feel the most lingering pain this year from ECB rate hikes The impact of last year's ECB rate hikes is set to have a bigger impact on southern than northern eurozone countries in 2024, according to our research. Asset prices and investments in the south have outperformed those in the north. But rapidly declining borrowing now suggests that that's about to change, not least because debt is rising rapidly   Southern eurozone countries have largely defied the impact of ECB rate hikes up to now While expectations initially were that southern European countries would face significant problems if the European Central Bank were to raise rates aggressively, this has yet to materialise. In fact, it seems to be the other way around: several indicators point to a stronger transmission of tighter monetary policy on northern and not southern European countries. Take the stock market, where performances in northern European main indices have been weaker than in the south. The Euro Stoxx 50 turned down in December 2021 as long-term yields started to increase globally. Since then, the German and French main indices have been up 5%, and the Dutch AEX is down 1.4%. But in Spain, Italy, Greece, and Portugal, the main indices have surged by 16, 11, 45, and 15%. Price developments in the housing market also point to a larger impact in northern Europe. Germany, Netherlands and France have seen house prices fall below their recent highs, while Italy, Spain, Portugal and Greece still experience increasing house prices, according to the latest available data.  The surge in investments in Southern European countries is remarkable. Admittedly, there is more to investment than just interest rates; think of the impact of the Recovery and Resilience Fund and possibly the delayed impact of low interest rates and the search for yield, as well as successful structural reforms. Still, investments in Southern European countries increased by some 15% since late 2020, while investments in core countries increased by less than 5% in the same period. We think a change is on the cards.    Investment and house prices have outperformed in southern Europe   Differences in transmission are starting to show As we argued in this recent piece, the pain of monetary tightening is likely to be felt more in 2024 than last year due to the long and variable legs of monetary policy transmission. It just takes a while before the impact of tightening really impacts the economy. There is increasing evidence that the transmission of monetary policy in 2024 will be less favourable for southern European economies. Take the most recent lending data. Lending volumes are currently falling in most southern European economies. In Italy, it's looking really rather serious as the 6% year-on-year fall of borrowing by non-financial corporates is worse than during the Global Financial and euro crises. Spain, Portugal and Italy see declining borrowing volumes for both households and corporates, while northern European economies are still seeing year-on-year growth in borrowing. Belgium and France do particularly well among larger markets, while Germany and Netherlands see stagnation. The differences in lending do not stem from differences in bank rates for new loans, as these don’t diverge materially.   Bank lending growth is diverging quickly, likely resulting in weaker periphery investment

Other input prices shot up As energy prices decreased, the costs of other materials, such as sand, stone and clay, rose significantly. Although these materials are abundant, environmental regulations can make quarrying difficult, for instance, which squeezes supply. The cost of these materials has increased by nearly 25% in the past two years. These price hikes are smaller than the energy price fluctuations, but they more or less offset the energy price reductions in the last year for building material production. Clay and sand are more essential components for the production than energy. We estimate that they account for two-and-a-half times more than energy costs   Sharp price increases of stone, sand and clay Price development: quarrying of stone, sand and clay (Index May 2020=100)   Concrete, cement and bricks' prices are less vulnerable than timber and steel Timber and steel prices react relatively quickly to changes in the market. If stocks of suppliers and wooden building materials increase, we can see price declines within just one to two months. The (global) market for these products is very competitive, so changing purchase prices are quickly passed on.  Building materials such as concrete and cement are heavy and voluminous. That's why they're often traded on relatively small local markets, resulting in less competition. This gives the suppliers of these products more market power, which usually results in both higher prices and lower price volatility. They do not have to pass on price reductions of raw materials or energy costs directly because of the relatively limited competition. As a result, the output prices of these products rise - and fall - at a slower rate compared to building materials such as wood, which are traded in more competitive markets   Small price decreases expected for concrete, cement and bricks Balance of manufactures in European Union which expects to increase/decrease output prices (over next 3 months)   Few producers expect price declines It looks like the strong price movements in building materials has come to an end. Only a small majority of steel, concrete, cement and brick suppliers expect to lower their sales prices. However, for metals shipped in containers, the Red Sea conflict poses an upside risk. The price fluctuations for timber also seem to be over. On balance, less than 1% of EU timber companies planned to increase their prices in December 2023

The stubbornly high cost of some European building materials despite cheaper energy It's been a torrid time for Europe's building materials producers, as construction projects have stalled significantly in the past couple of years. We think the worst will be over for them soon, but that's not the whole story. Despite lower energy costs, input prices remain stubbornly high.   Building material production levels will bottom out in 2024 We expect 2024 to be a year of transition for the building materials industry comprising of concrete, cement and bricks. In most European countries, production levels tumbled in the past couple of years; volumes are down by almost 15% in Spain and by nearly 25% in Belgium compared with the beginning of 2022. We believe that those volumes will not start to recover until 2025. Should European interest rates start to come down, as we expect, and we see sustained higher wages, we're likely to witness a turning point leading to more investments in new premises. However, building projects have a long lead time and the number of issued building permits was still declining in the third quarter of 2023. It will take some time before sales pick up.   Sharp drop building material production due to less new construction Volume production building material industry (eg. concrete, cement & bricks), Index January 2022=100 SA   The beginning of the end of the decline There are signs indicating that the worst is over. For instance, the confidence indicator for the EU construction sector is still negative but has slowly improved during the last few months of 2023. The confidence indicator for the building material sector has stopped decreasing. In addition, EU house prices rose again and increased in the third and fourth quarters of last year. This allows project developers to increase prices for new-build dwellings. Project plans that weren’t profitable due to higher building costs can now, at least in some cases, be lucrative again.For example, local Dutch data support this changing trend. Project developers have seen their sales increase since summer 2023 after a period of decline, and sales of new homes are also on the rise again.   Producer confidence in building material sector is bottoming out Producer Confidence indicator European Union, SA (monthly, latest data point Dec 2023)   Building material industry more volatile than construction sector The developments in the building material industry are closely related to the construction sector. Yet, this industry is more vulnerable to economic shocks. There are two reasons for this. Firstly, building material companies generally have higher fixed costs as they have invested more in machinery and factories than construction companies. This makes building material companies less agile; therefore, they have more difficulties scaling down during an economic downturn. Secondly, building materials deliver relatively more supplies for the construction of new buildings and, to a lesser extent, for renovation.In general, the construction of new buildings is more volatile than renovation. Consequently, building material firms are now more negative than contractors as new building production faces larger obstacles than the renovation market. We saw the same developments during previous setbacks: building material companies were more pessimistic than construction companies at the beginning of the Covid-19 pandemic and the earlier financial crises.   Building material prices are decreasing The prices of many building materials peaked during the summer of 2022 and have steadily fallen since. The cost of timber and plastic inputs for construction companies have particularly fallen back but they're still higher than their pre-Covid levels. This is due to weakening demand as economic growth is sluggish and construction volumes, especially of new buildings, are declining. The diminished supply chain disruptions after Covid have also eased the upward price pressure. However, the current trade impact of attacks on merchant ships in the Red Sea is just one example of the continued vulnerability in supply chains and could threaten further new price increases.   Concrete, timber, plastics and steel prices are declining Producer Price Index, Index January 2020=100, European Union    

UK PMIs point to brighter growth outlook but stubborn inflation Unlike the eurozone, the UK's service sector is picking up steam. The issue for the Bank of England is that inflation is also proving sticky, and the PMI highlights the disruption in the Red Sea. Today's data adds to the case for the Bank of England to wait a little longer before cutting rates. We expect a cut in August.   The UK service sector, which accounts for the lion’s share of economic output, edged further into growth in January, according to the latest purchasing manager’s index. What’s particularly interesting is that this extends a recent trend whereby UK service sector growth is apparently accelerating at a time when the equivalent eurozone index is edging further into contraction (though Europe’s manufacturing sector appears to be bottoming out). Before last autumn, the UK’s services PMI had largely tracked what was happening in its closest neighbours. This is another signal that the consensus among economists going into this year, which suggests the UK will underperform most major European economies in 2024, looks a bit too gloomy. While the recent sharp fall in market rates is good news for all economies, in the UK it makes a particular difference to the mortgage squeeze given the relatively high share of households due to refinance this year (around a fifth). Other economies, like France and the US, have a higher prevalence of much longer fixed-rate mortgage products. The anticipation of Bank of England rate cuts also looks highly likely to translate into more tax cuts in the spring, with the Chancellor set to be gifted with around £12bn extra “headroom” to spend whilst still meeting his fiscal rules.   The UK's services PMI has started to diverge from the eurozone   When it comes to rate cuts, the reality is that the BoE is putting relatively little weight on activity data right now. And on inflation, the press release from S&P Global contains a few sentences that policymakers won’t want to hear. There are reports of increased input cost pressures following the Red Sea disruption. It’s worth emphasising though that the PMI is a diffusion index, so it tells us that more firms than before are reporting higher cost pressures, but it doesn’t say anything about the magnitude of the price rises. For now, we don’t think the Red Sea crisis will make a decisive difference to the UK inflation outlook. It may slow the decline in core goods inflation, but ultimately we still expect headline CPI to dip below 2% in April. The PMI also notes ongoing wage pressures in the service sector, and this echoes the BoE's survey of Chief Financial Officers (CFOs) which suggests pay growth expectations have been stuck around 5% for several months now. All of this serves as a reminder that the BoE won’t be rushed into rate cuts this year. Its new forecasts next week will reflect an inflation backdrop that is much improved since the last projections in November. But the committee will want to see more progress on services inflation and wage growth before acting, while a large tax cut package in March would probably be another reason to hold rates higher for a little longer. Our base case is for an August start to rate cuts and 100bp of easing in the second half of the year. Markets have more-or-less aligned with this view too.

Agriculture – Cocoa jumps on supply woes Cocoa futures trading in New York surged to fresh record highs yesterday on the back of a worsening supply outlook from the top producers - Ivory Coast and Ghana. Recent reports suggest that weather conditions and the insufficiency of fertilisers in these countries have resulted in lower output levels. Meanwhile, total cocoa arrivals at the Ivory Coast ports so far this season have dropped to 951.7kt as of 21 January, down 37% for the same period last year.   The latest data from the Indian Sugar Mills Association (ISMA) shows that Indian sugar production dropped 5.3% YoY to 15mt for the 2023/24 season until 15 January. Sugar production has been recovering over the past few weeks and the Association estimates that total sugar production for the 2023/24 season could still be higher than its earlier estimates on improving weather and higher prices for sugarcane to farmers. The Association also requested the government to allow an additional 1-1.2mt of sugar diversion for ethanol production citing sufficient availability for the domestic market. In its latest weekly report, the European Commission revealed that the EU’s soft wheat exports for the ongoing season stood at 17.4mt as of 19 January, down by 7.6% compared to 18.8mt reported in a similar period a year ago. The major destinations for these shipments were Morocco, Algeria, and Nigeria. The commission added that the nation's corn imports stood at 9.9mt, down 42% compared to a year ago. Agriculture and Agri-Food Canada (AAFC), in its first estimates for the 2024/25 season, expects Canada’s wheat production to increase 4.2% YoY to 33.3mt. The group estimates yield to rise to 3.23t/ha from 2.99t/ha, whilst harvest area is expected to decline from 10.94m hectares to 10.73m hectares for the 2024/25 season.

Metals – Aluminium gains on EU sanction threats Aluminium prices rose over 3% yesterday and led the gains among base metals after reports suggesting the possibility of further sanctions by the European Union on Russian aluminium. There are speculations of a potential complete ban on aluminium imports in the upcoming Russian sanctions package scheduled to be released next month. Russian metals had broadly escaped sanctions until last month, when the UK prohibited British individuals and entities from trading physical Russian metals, including aluminum, nickel and copper. UK is the only country in Europe to have adopted such measures. This could potentially lead the LME to reopen the debate over whether it should ban deliveries of Russian metal. Just under 80% of the aluminium on the LME was of Russian origin at the end of November. Steel inventories at major Chinese steel mills rose for a second consecutive week to 15.4mt in mid-January, up 6.7% compared to early January, according to data from the China Iron and Steel Association (CISA). This indicates that Chinese mills are restocking inventories as they remain optimistic about the near-term demand outlook. Meanwhile, crude steel production at major mills rose 3.7% from early January to 2.09mt/d in mid-January, as many mills resumed production activities post-maintenance. In nickel, the data from the International Nickel and Study Group (INSG) shows that the global nickel market remained in a supply surplus of 35,300 tonnes in November, when compared to a marginal surplus of 7,800 tonnes in the same period last year. Earlier, the global nickel market saw an oversupply of 26,000 tonnes in October as well. Cumulatively, the nickel market encountered a supply surplus of 212,500 tonnes in the first eleven months of 2023, up from the surplus of 80,200 tonnes seen in the same period last year. Lastly, the latest LME COTR report released yesterday shows that investors decreased net bullish positions for copper by 2,478 lots for a third consecutive week to 54,375 lots in the week ending on 19 January. Similarly, money managers reduced net bullish bets in aluminium by 4,459 lots for a second straight week to 109,596 lots as of last Friday. In contrast, net bullish bets for zinc rose by 2,322 lots (after reporting declines for two straight weeks) to 29,776 lots at the end of last week.

The Commodities Feed: EU sanction plans on Russian aluminium An easing USD offered support to the commodity complex, with oil prices edging higher this morning. On the inventory side, API numbers remained largely bullish for the oil market. Meanwhile, recent reports of EU plans to sanction Russian aluminium helped to lift aluminium prices.   Energy – Weaker USD supports the complex The oil market has been trading higher this morning as a sharp drawdown in oil inventories reported by API helped to improve the broader sentiment. Meanwhile, a softer dollar also supported the complex. The prompt spread for Brent has moved into a deeper backwardation of US$0.43/bbl up from just US$0.03/bbl at the start of the year, indicating tighter near-term conditions. Recent numbers from the American Petroleum Institute (API) reported yesterday remained largely constructive. US crude oil inventories fell by 6.67MMbbls over the last week, significantly larger than the market expectations. Similarly, Cushing crude oil stocks are reported to have decreased by 2.03MMbbls. On the other hand, a sharp rise in gasoline stocks weighed on demand expectations. API reported that gasoline stocks jumped by 7.2MMbbls while distillates inventories fell by 0.25MMbbls, over the week ending 19 January. The more widely followed EIA report will be released later today. Meanwhile, the geopolitical situation in the Middle East remained uncertain. Qatar delayed LNG shipments to Europe as the ongoing tensions in the Red Sea are slowing shipment deliveries. It has been reported that Qatar has diverted at least six shipments heading to Europe from its regular Red Sea route since 15 January. However, despite the transport challenges, Qatar has not reduced its LNG exports with shipments for the last two weeks estimated to be up 7% compared to the same period last year. The gas market has managed to remain largely unaffected so far with the recent disruptions in the Red Sea. European gas futures continue to trade near six-month lows due to weak industrial demand, availability of alternative LNG supply and higher inventory levels.

Eurozone PMIs show very tentative signs of bottoming out The eurozone economy continues to trend around 0% growth and there are no signs of any imminent recovery. Price pressures are still increasing for the service sector, which provides another argument for the ECB not to hike before June. How you read today’s PMI release for the eurozone reveals whether you’re an optimist or a pessimist. The increase from 47.6 to 47.9 in the composite PMI for January cautiously shows signs of bottoming out but also still indicates contraction. We also note that France and Germany saw declining PMIs, making the increase dependent on the smaller markets. Manufacturing price pressures remain moderate despite the Red Sea disruptions, but the service sector indicates another acceleration in input costs. To us, this shows that the eurozone economy remains in broad stagnation and that risks to inflation are not small enough to expect an ECB rate cut before June. The eurozone continues to be plagued by falling demand for goods and services, although new orders did fall at a slower pace than in recent months. Current production and activity were weaker than in recent months, though, suggesting that January started with contracting output still. The slowing pace of contracting orders does suggest that there is a bottoming out happening though. Whether this is enough to show positive GDP growth in the first quareter depends on February and March. In any case, GDP growth is so close to zero that we still qualify the current environment as broad stagnation anyway. The PMI continues to show some concern around inflation. Even though demand remains lacklustre, services cost pressures are on the rise again due to higher wage costs which are being transferred to consumers. Cost pressures on the goods side remain low despite Red Sea disruptions as energy prices trend lower and demand overall remains weak. This also means that goods inflation continues to trend down according to the survey. So, despite Red Sea problems prominently featuring in the news, inflation concerns currently stem more from services than goods, interestingly. For the ECB, enough worries about inflation not trending down to 2% quickly still remain. We think that makes a first cut before June unlikely.

NZD: Non-tradeable inflation offers RBNZ a hawkish "loophole" New Zealand’s inflation matched estimates at 0.5% quarter-on-quarter and 4.7% YoY in the 4Q print published overnight. This is a touch higher than our forecast (4.6%), but well below the 5.0% projected by the Reserve Bank of New Zealand for the period. However, non-tradeable CPI did come in hotter than expected at 1.1% QoQ, which has led to a move higher in short-term NZD rates. In FX, NZD/USD broke back above 0.6100 on the release, even though it quickly defaulted to being traded by external factors. The stronger non-tradeable CPI may offer an excuse for the RBNZ to stick to some hawkish narrative on 28 February, although they will need to admit that general inflation pressures have declined and the economy underperformed, making any promise of higher-for-longer a harder sell to markets. The next key release in New Zealand is the 4Q jobs report on 6 February. Until then, expect volatile Chinese sentiment and USD dynamics to drive NZD performance. Even in the case of an RBNZ dovish shift, we like the chances of a higher NZD/USD beyond the short term as the Kiwi dollar benefits from a broader USD decline and Fed rate cuts. Our year-end target is 0.64.

CAD: BoC to make dovish shift more gradually than the Fed The Bank of Canada announces monetary policy today and will almost surely keep rates on hold. As discussed in our BoC preview, the focus is on whether the Bank is ready to deliver a Fed-like dovish pivot. We think it may be too early for a radical shift in the policy message. December’s core inflation figures were hotter than expected, with the trim measure rising from 3.5% to 3.7% and the median measure holding at a revised 3.6%. That may well be enough to outweigh concerns about a cooling off in the jobs market: full-time employment declined by 25k in December. While the hawkish bias should be softened and the discussion on rate cuts opened, we think the BoC will fall short of the dovish stance expressed by the Federal Reserve in December. Expect the policy message to include concerns about the path of inflation and readiness to keep policy restrictive for longer if necessary. Markets are pricing in around 110bp of tightening by the BoC in the next 12 months: we suspect today’s meeting will fail to endorse those expectations, and CAD can find some moderate support. Still, we expect USD/CAD to find good demand below the 1.34 mark.

EUR: A new PMI test EUR/USD is around 1.0% cheaper compared to its short-term financial fair value at current levels. Normally, only deviations beyond the 1.5 standard deviation band (+/- 1.5% for EUR/USD) are followed by rapid convergences to the fair value. However, we believe the dollar rallied a bit too far yesterday, and there is some room for EUR/USD to tick back above 1.0900 into tomorrow’s European Central Bank announcement (here is our preview). At the same time, much of today’s price action in the pair will depend on PMIs. French and German figures are published ahead of the eurozone-wide numbers this morning. Expectations are modestly optimistic, with the eurozone composite PMIs seen rising from 47.6 to 48.0, led by marginal gains in both services and manufacturing. PMIs are often assessed in comparison with other countries. In the case of the eurozone, against the US and the UK. The consensus for UK PMIs is for a flat 52.1 (composite) reading. Barring a material surprise in the eurozone print, the lingering divergence between contractionary (EZ) and expansionary (UK) PMIs will keep EUR/GBP pressured today.

FX Daily: Unwinding the spurious dollar rally The dollar strengthened across the board yesterday with no clear catalyst. We suspect that in an environment that keeps pricing large Fed cuts, USD rallies aren’t very sustainable. We’ll be awaiting the next leap higher in short-term USD rates to endorse a dollar rebound. Today, the focus is on PMIs and the Bank of Canada, which may disappoint dovish bets.   USD: Sticky Fed cut bets hinder USD rebound The dollar rebounded sharply yesterday as the risk-on mood generated by Beijing’s reported stock support package evaporated during London trading hours. The Hang Seng is having another good day today, even though Beijing’s measures appear an emergency and temporary solution, more a symptomatic treatment rather than addressing fundamental economic concerns. European and US equities failed to follow the Hang Seng's gains yesterday but also showed broad resilience. The rise in US rates did not look large enough to justify the rotation from European FX (EUR and GBP) back into the dollar. In all, we admit the dollar jump was quite surprising, and without a clear catalyst, and therefore see room for the dollar correction initiated overnight to extend today. One dynamic to keep an eye on – however – is the impact on markets of US Republican Primaries. The underperformance of the Mexican peso since the start of the week may be indicating markets are pricing in a larger chance of Donald Trump winning the presidency after Ron DeSantis endorsed him. Trump won the New Hampshire primary yesterday, securing 55% of votes and casting serious doubt on the future of Nikki Haley’s campaign. It all seems rather premature, but Banxico is also on the brink of a rate cutting cycle – as discussed here by our rates team – which can compound to keeping the peso soft. This should not translate into a one-way direction for the peso though, we still expect to see high demand in the dips, not least due to the preserved carry attractiveness and our view of a US dollar decline. Today, the focus will be on S&P Global PMIs across developed countries. Markets have become gradually more sensitive to this US survey, even though the ISM remains the main reference. Expectations are for a tiny decline in manufacturing PMIs (already in contraction area) and a stabilisation in services. We don’t have a strong bearish view on the dollar in the short-term, but yesterday’s moves did appear overdone in an environment where Fed funds futures still price in 130/140bp of cuts this year. We’ll be more convinced of the sustainability of a near-term dollar rebound once short-term Treasury yields take another leap higher (two-year rates are down nearly 10bp since yesterday). Revamped rate hike bets in Japan are pushing USD/JPY lower this morning, favouring a broader dollar correction which could have legs today. Francesco

Deteriorating affordability will dampen Spanish house price growth Despite a 9% drop in property sales last year, Spanish house prices remain firm. Higher interest rates and property prices have greatly worsened affordability, forcing many first-time buyers to postpone their plans. An ING survey shows that 46% of Spanish renters cannot afford to buy their own home.   Sales fall by around 9% by 2023 The number of property sales fell 9% in the first 11 months of 2023. According to figures released by the Spanish statistical office last Friday, the number of property sales was 15% lower in November compared to the corresponding month in 2022. Mortgage demand experienced an even sharper drop, with an 18% drop in the first 10 months of 2023, compared to the same period in 2022. This shows that first-time buyers, in particular, are struggling to buy amid rising interest rates. Investors, who are less likely to use a mortgage loan to buy a property, are less interest rate sensitive than first-time buyers, which explains the difference. Moreover, investor demand was supported last year by an increase in the number of foreigners buying homes in Spain.   Spanish house prices still show solid price growth Despite the sharp rise in interest rates and the economic slowdown, Spanish house prices are showing strength. While transaction volumes have seen a significant drop, Spanish house prices continue to rise. In late December, INE revealed that Spanish house prices rose 4.5% in 3Q 2023 compared to the previous year, outperforming the eurozone average, which recorded a 2.2% decline. In Germany, prices fell more than 10% year-on-year. Although fourth-quarter figures are still pending, TINSA data shows that house prices will continue their upward trend until the end of 2023, which could result in average house price growth of around 4.5% for the whole year.   Evolution of house prices 3Q 2023 vs 3Q 2022   New-build homes much more expensive, but expected to level off this year The price of new-build homes rose sharply last year: the price of a new-build home in the third quarter of 2023 was up 11% on last year. In contrast, existing homes experienced a more modest increase of 3.2% over the same period. This year, the strong price increases for new-build homes are expected to level off. Last year, developers still had to pass on a lot of price increases due to sharp increases in the price of building materials due to supply problems following the Covid-19 pandemic. However, this effect will soften in 2024. Construction costs have cooled sharply over the past year. According to figures from the National Bank of Spain, construction costs were slightly (-0.6%) lower than a year ago in October, showing that underlying price pressures have eased sharply   Construction cost index, % YoY   Affordability sharply deteriorated over last two years Affordability has worsened significantly over the past two years due to a sharp rise in interest rates since early 2022, combined with robust growth in house prices. Calculations by the National Bank of Spain show that Spanish families now spend on average 39% of their annual disposable income on mortgage payments in the first year after buying a house. By contrast, the figure was 30% in 2021, underlining the challenges newcomers face when buying a home. Consequently, many first-time buyers have had to postpone their plans to buy a home in recent months due to the mounting financial pressures. Assumptions in compiling the chart below: Gross amount of monthly payments payable by the median household in the first year after the purchase of a typical home financed with a standard loan for 80% of the value of the flat, as a percentage of the household's annual disposable income.   Housing affordability: theoretical monthly repayments without deductions   46% of Spanish renters cannot afford to buy their own home The combination of rising interest rates and continued house price growth has significantly worsened affordability for first-time home buyers, forcing many to stay longer in the rental market. According to an ING survey conducted by IPSOS in November, 46% of Spanish renters said they would like to buy their own home but do not have the financial means to do so. As affordability continues to be under pressure for first-time buyers, demand for rental housing is expected to remain high. Moreover, deteriorating affordability is likely to lead young people to live with their parents for longer. According to the latest Eurostat figures available, Spaniards left their parental homes after an average of 30.3 years in 2022, which is already significantly higher than the eurozone average of 26.3 years. The average age at which people leave the parental home is likely to rise in the 2023-2024 period.   House price growth expected to slow slightly this year but remain strong We expect house price growth of 3% this year, moderating slightly from last year. Several factors that boosted growth last year will slow down now that the catch-up effect has worn off, including the gradual weakening of price increases for new-build homes and less strong demand from foreigners buying a home in Spain. In addition, affordability for first-time buyers will remain under strong pressure, which will put a brake on further price increases. Although interest rates have fallen somewhat in the last few weeks of 2023, affordability remains worse than a few years ago. Moreover, the further downside potential for fixed interest rates is relatively limited. Markets have already strongly anticipated the European Central Bank's first rate cuts this year. Moreover, the ECB will continue to reduce its bond portfolio next year and the precarious state of public finances also limits further downside potential. Therefore, we think long-term interest rates will end this year at about the same level as now. However, floating rates could fall more sharply, especially if the ECB starts cutting policy rates. This could support the market in the second half of the year. In addition, further growth in demand will be a key driver of house prices in the coming years. According to projections by the Spanish statistical office, the number of Spanish households will increase by 2.7 million between 2022 and 2037, representing growth of 14.5%. This will put upward pressure on prices. Moreover, Spaniards themselves are very optimistic about the development of house prices. An ING survey conducted by IPSOS in late November showed that only a minority of 7% thought house prices would fall in 2024. All in all, we expect 3% growth for this year, which in real terms amounts to de facto stagnation, considering the expected inflation of around 3%.   House price evolution Spain, including forecasts ING

Bank of Japan opens the door to ending negative rates, but timing uncertainty remains The Bank of Japan stood pat on monetary policy today as widely expected. But the market is now paying attention to a more positive tone on the wage and inflation outlook, as well as an upgrade to the FY2024 inflation outlook which lays the groundwork for policy normalisation. We still see a slightly higher chance of a first hike taking place in June than in April.   No surprise that the BoJ kept its policy rate and 10-year yield target unchanged We think the Bank of Japan's modest change in its view on inflation hints that policy normalisation is approaching. The BoJ assessed its statement that the likelihood of achieving the price goal has “continued to gradually rise.” Governor Kazuo Ueda’s comments on wages and inflation were also more positive than in previous meetings, signalling that a path to policy normalisation could be underway. Markets were likely pleased to hear that the central bank would consider whether negative rates should remain if the price goal is in sight and that it can make policy decisions without all small firm wage data.   Quarterly outlook report Aside from the policy decision itself, the BoJ’s quarterly outlook report was closely watched by market participants. As we expected, the BoJ lowered its core inflation outlook for FY 2024 from 2.8% to 2.4% while upgrading the outlook for FY 2025 from 1.7% to 1.8%. The government's efforts to curb inflation and the recent weaker-than-expected global commodity prices will likely drag down the price for early 2024, but the BoJ still sees underlying inflation pressures remaining through FY 2025, induced by solid wage growth. This tells us that a rate hike is only a matter of time – but with the BoJ reconfirming its patient easing stance, the timing remains uncertain.     BoJ outlook Market bets on an April rate hike increased sharply after today’s decision, but for now, we retain our long-standing view of the first rate hike materialising in June. Of course, this could change depending on upcoming inflation trends and growth conditions. There was no change in the forward guidance from today’s statement, and we don’t think the BoJ will deliver any policy changes at its next meeting in March. We also don't expect it to make any noise by delivering a surprise policy change at the end of the fiscal year. Governor Ueda has stated that more information will be available ahead of the April meeting than in March, so we're inclined to think that the latter is probably off the table. There are several areas to follow to gauge the precise timing of the BoJ’s policy change, but inflation should be considered the most important of them all. In our view, the inflation path up until April will be quite bumpy, exacerbated by the government’s energy subsidy programmes. Consumer inflation has slowed over the past two months as the government renewed some of the subsidy programmes from last November, combined with softening oil prices. We expect inflation to move even lower in January (vs 2.2% in December) but pick up quite sharply again in February. April CPI is a key piece of data for judging the inflation trend, but by the time the April meeting is held, the nationwide CPI report won't yet be available. April is also in the middle of the wage-negotiating Shunto season. While Governor Ueda mentioned that there isn't any need to wait to gather all data from small firms, we belive that the BoJ will wait a couple of more months to see if the wage growth could actually lead to sustain inflationary pressure – particularly in service prices. The BoJ will take orderly steps, including forward guidance being revised before any action is taken. We think that this revision will likely happen in April. Taking these factors into consideration, we still expect the Bank of Japan to announce its first rate hike in June for now.     Choppy inflation is expected at least for 1Q24   FX: Not hawkish enough USD/JPY held pretty steady after the release of the BoJ decision but dropped around 0.7% as Governor Ueda hinted that wages and prices were heading in the direction of price stability. The same thing occurred in the JGB market, with 10-year JGB yields edging about 3-4bps higher around the same time as USD/JPY sold off. As above, market expectations of a shift in BoJ policy will now roll on to the 26 April meeting, when the next set of CPI forecasts will be released. Today’s price action, where the yen is now handing back its short-term gains, suggests the market will be happy to park the BoJ policy normalisation story until April. Given further upside risks to US rates over the next month – including the risk of higher Treasury yields next week, should the US quarterly refunding announcement shine a light on the US fiscal deficit – USD/JPY can probably continue to trade around this 147/148 area. And BoJ intervention remains a threat should USD/JPY trade over 150 again. We currently have USD/JPY forecasts at 140 for the end of March and 135 for the end of June. We certainly like that direction of travel – particularly if the short-end of the US curve starts to break lower ahead of the first Fed hike, which we forecast in May. The risk is that mixed market sentiment and low volatility keep interest in the carry trade and keep the yen softer than our end-of-first quarter target. However, we suspect carry trade investors will be increasingly turning to the Swiss franc as their preferred funding currency. The Swiss National Bank wants a weaker currency and may be the first to ease. The BoJ wants a stronger currency and will now be the only G10 central bank to hike.   

Agriculture: Shipping disruptions from Brazil push coffee higher Arabica coffee front month contract jumped around 7% yesterday as shipping disruptions from Brazil risk tightening the market in the short term. Brazil’s ports are facing strikes by customs officers and other inspectors from 22-26 January that are likely to delay shipments originating from Brazil. The tensions around the Red Sea trade route have further supported coffee prices. The shipment disruptions from Brazil could impact other commodities as well including soybeans, corn and sugar.   According to China’s Ministry of Agriculture and Rural Affairs, soybean production in China reached an all-time high of 20.84mt in 2023 primarily due to the country’s support for food security. Meanwhile, the soybean planting area in China reached 157 million mu (about 10.47 million hectares) last year, while that of oilseed crops exceeded 200 million mu. The ministry added that it plans to further increase the planting of genetically modified corn and soybean crops in a push to boost grain output and bolster food security in the country.   The USDA’s weekly export inspection data for the week ending 18 January shows that export inspections for corn stood at 713.3kt over the week, lower than 946.4kt in the previous week and 728.8kt reported a year ago. Similarly, US soybeans export inspections stood at 1,161.1kt, down from 1,278.2kt a week ago and 1,839.2kt seen last year. For wheat, US export inspections came in at 314.5kt, compared to 242.2kt from a week ago and 349.4kt reported a year ago.

Metals: Nickel under pressure Nickel continues to trade under pressure this year after slumping more than 40% in 2023 as increased supplies from Indonesia have raised concerns over a global supply glut. Lower prices have been prompting miners to cut back on supplies. Wyloo Metals Pty Ltd., owned by Andrew Forrest, said it’s shutting down mine operations in Western Australia from 31 May due to the prolonged weakness in the nickel market. As a result, parts of BHP’s Kambalda concentrator will also be suspended starting in June because they can no longer receive ore supply from Wyloo’s halted mines. Recent numbers from the International Aluminium Association (IAI) show that the average daily global primary aluminium output was flat at around 194.9kt in December, compared to 195kt reported a month earlier. Total monthly output rose 2.1% year-on-year (+3.3% month-on-month) to 6.04mt last month, following improved production levels from almost all major producing countries. Meanwhile, cumulative aluminium production rose 2.3% YoY to 70.6mt for the full year 2023. Similarly, Chinese output is estimated to have increased 2.4% YoY (+3.3% MoM) to 3.57mt last month, while year-to-date production is seen rising by 3.1% YoY to 41.7mt in Jan’23-Dec’23. Production in Western and Central Europe also recovered 3.1% MoM to 231kt in December, while year-to-date output still declined 6.9% YoY to 2.7mt last year. Meanwhile, aluminium production in Asia (ex-China) rose 2.6% YoY to 401kt in December. The International Copper Study Group’s (ICSG) latest update shows that the global copper market remained in a supply deficit of 119kt in November. Meanwhile, the Group estimates a total deficit of 130kt over the first 11 months of the year amid subdued mine production and higher demand (particularly in China). Global mine and refined copper production increased by 1% YoY and 5.5% YoY, respectively, while overall apparent refined demand increased by 4% YoY over the first 11 months of the year.

The Commodities Feed: Oil pushes higher on rising tensions Oil extended its upward rally this morning amid continuing tensions in the Middle East. Reports of drone attacks by Ukraine against facilities on the Baltic coast – a key oil export route for Russia, has further supported the oil market.   Energy: Brent holds above US$80/bbl The oil market continued to rally this morning with ICE Brent trading around US$80.4/bbl as of the time of writing. The heightened geopolitical tensions have continued to provide support to the oil market with the recent reports of more airstrikes by the US and UK against the Houthis in Yemen. Meanwhile, drone strikes by Ukraine have shut down a Novatek PJSC gas-condensate terminal on the Baltic coast over the weekend, raising concerns for the oil exports from Russia’s western ports.   North Dakota’s pipeline authority estimates that oil production in the region was down around 250-300Mbbl/d as of 22 January due to the operational challenges amid the cold snap. The estimates have slightly improved from Friday’s estimate of being down around 350-400Mbbl/d as the weather has improved. The extreme cold weather in the US has also impacted refining operations in the country with around 15% of refining capacity in the Gulf Coast region reported to be offline as of last Friday. Libya could resume its oil exports and production from its largest oil field which has been shut for about three weeks. The National Oil Corp. said that oil output at Sahara fields will restart as the force majeure is lifted. The restart of the operations came after the local governments agreed to meet most of the demands from protestors. Crude oil production at the oil field stood at around 270Mbbls/d earlier.

ECB bank lending survey shows monetary transmission persisting Ahead of Thursday's ECB meeting, the bank lending survey provides confirmation that higher interest rates still dampen loan demand from businesses and households. This leaves the outlook for investment rather bleak, but also confirms easing prospects for the central bank later in the year.   The European Central Bank's fourth quarter survey suggests that monetary transmission continues to be forceful, but perhaps somewhat less so than in previous quarters. Banks continued to tighten their credit standards to enterprises and business demand for loans weakened once more, but again, less so than seen previously. This still makes credit standards the strictest and loan demand the weakest seen in a long time. According to the survey, businesses indicated that high interest rates and low demand for fixed investment are the main reasons for weaker loan demand, which makes the outlook for lending and investment quite bleak. For households, credit standards also became somewhat stricter again while terms and conditions of loans eased. Most importantly for the housing market, demand for loans continued to decrease forcefully. Main contributors maintain a downbeat view on the housing market, low consumer confidence and high interest rates. Expectations are for loan demand to slightly improve again in the first quarter, while credit standards are still expected to become stricter. This does cautiously suggest that the eurozone is getting close to the point where the impact of monetary tightening on new loans will ease off slightly. That does not mean, however, that there will be overall easing of conditions. Average interest rate payments are still set to rise as businesses and households have to refinance at higher rates. For the ECB, the survey provides confirmation that monetary transmission remains forceful and that economic activity will remain curbed by tight policy in the coming quarters. That further paves the way for first rate cuts over the course of the year

CEE: Fair level reached before next move Yesterday's data published in Poland was fairly mixed, indicating cautious signs of recovery in industry and construction but weaker growth in retail sales. The general economy gained momentum in the fourth quarter of last year but the pace slowed after the third quarter. December is again hopeful that a recovery is coming. Today's calendar is essentially empty except for Hungarian wage data. It gets more interesting in the bond space. In Poland, the first auction will take place today after the recent sell-off and political tensions. At the same time we saw a hawkish turn from the National Bank of Poland. So today's auction will test where demand is after recent events. The FX market opened the week in CEE in line with our expectations yesterday. PLN managed to stabilise around 4.360 per euro and for now we don't see too much bias either way until we see more progress on the political side. EUR/CZK remains in the 24.700-800 range where it is likely to remain in the days ahead, unless the CNB steps in with bolder statements than we have seen so far. EUR/HUF has moved up into our 383-384 range and given the rate pricing we think this will be the level ahead of the National Bank of Hungary's meeting next week.

NZD: We expect 4Q CPI at 4.6% We recently updated our estimates for the fourth quarter CPI in New Zealand, and expect a 0.4% quarter-on-quarter print which translates into 4.6% year-on-year. Consensus is centred at 4.7%, signalling that expectations are for a marked undershot compared to the latest RBNZ fourth quarter CPI projections at 5.0%. The Reserve Bank of New Zealand delivered a hawkish surprise at the November meeting as it signalled no rate cuts until mid-2025 and threatened more tightening if inflationary pressure increased. We think that today’s CPI print will force some softening in the RBNZ’s stance when it announces monetary on 28 February. New projections will be released at the February meeting, and softer than expected growth and (in our view) inflation – as well as a dovish repricing in global rate expectations – may well prompt a revision lower in the rate path. Markets are already pricing in 95-100bp of easing by the end of the year in New Zealand, meaning that NZD is probably more likely to be affected by stronger data and hawkish RBNZ surprises than by a data-miss/dovish surprise combination. For this reason we think that NZD/USD will not get hit hard as the RBNZ pivots to a more dovish stance and still favour the pair to trade higher from the second quarter on the back of a weaker USD and improved risk environment. Today, the rebound in China’s sentiment can help absorb the impact of softer inflation for NZD.    

EUR: Benefits from better risk sentiment The eurozone consumer confidence and the ECB lending survey are in focus today as markets await tomorrow’s PMIs and the European Central Bank's decision on Thursday. We summarise our expectations for FX and rates under different scenarios in January’s ECB Cheat Sheet. EUR/USD jumped after overnight news out of China, taking the pair closer to its short-term fair value model of 1.0980 (in our calculations). The direction of travel today for the pair will mostly be a consequence of whether Western stock indices will be able to keep the positive mood shown by Asian equities and FX. We still deem a sustainable rally to levels above 1.100 as unlikely and do not see the ECB meeting as a game changer for the euro.  

FX Daily: Asia in the driver's seat The dollar is softer and pro-cyclical currencies are following the yuan higher after news that China is preparing a CNY 2tn rescue package for the stock market. The BoJ revised inflation expectations lower but signalled further progress towards the target, keeping anticipation for a hike in June alive. We expect New Zealand CPI to be soft tonight.   USD: China and Japan in focus The dollar has been mostly moved by developments from outside of the US since the start of the week. China remains the centre of attention before key central bank meetings in the developed world. Risk sentiment was boosted overnight as the Chinese government is reportedly considering a large CNY 2tn package to support the struggling stock markets. The rescue plan should be mostly targeted to the Hang Seng stock exchange, which has sharply underperformed global equities of late. This is a strong message that conveys Beijing’s intention to artificially support Chinese markets in spite of the deteriorating economic outlook in the region, and it is reported that other measures are under consideration. It does appear a temporary solution, though. Ultimately, stronger conviction on a Chinese economic rebound is likely necessary to drive a sustainable recovery in Chinese-linked stocks. For now, the FX impact has been positive; USD/CNY has dropped to 7.16/7.17 and we are seeing gains being spread across pro-cyclical currencies as safe-haven flows to the dollar are waning. Doubts about the impact of Beijing rescue package’s effects beyond the short-term automatically extend to the FX impact. It does seem premature to call for an outperformance of China-linked currencies (like AUD and NZD) and softening in the dollar on the back of this morning’s headlines. Another important development in Asian markets overnight was the Bank of Japan policy announcement. In line with our expectations and market consensus, there were no changes to the yield curve control, and forward guidance remained unchanged. Inflation projections were revised lower from 2.8% to 2.4% for the fiscal year starting in April. The revision was mostly a consequence of declining oil prices, and the inflation path continues to show an overshoot of the target for some time. All this was largely expected, and markets are focusing on Governor Kazuo Ueda’s claim that Japan has continued to inch closer to the inflation goals, keeping expectations for an eventual end to the ultra-dovish policy stance some time this year. The yen is experiencing a rebound which is likely boosted its oversold conditions. Money markets currently price in a 10bp rate hike in June. Extra help from a declining USD this morning might push USD/JPY a bit lower (below 147) today, but we suspect that markets may favour defensive USD positions as the Fed meeting approaches. Domestically, the only release to watch today in the US is the Richmond Fed Manufacturing index, which will give some flavour about the state of the sector ahead of tomorrow’s S&P Global PMIs. DXY may stabilise slightly below 103.00 once the China-led risk rally has settled.

Singapore's central bank likely to stand pat after inflation picks up Stubborn inflation points to the Monetary Authority of Singapore standing pat at its 29 January meeting.   December inflation picks up to 3.7% Singapore’s December inflation quickened to 3.7% year-on-year, faster than markets had forecasted (3.5% YoY) and up from the 3.6% YoY reported in the previous month. December saw food inflation moderate to 3.7% YoY (from 4% YoY) while clothing inflation fell 1% YoY.  Forcing headline inflation higher were faster prices increases for transport (3.9% vs 2.8% YoY) and recreation and culture (6.3% vs 5.6% YoY previously). Meanwhile, core inflation, which is the price measured more closely followed by the Monetary Authority of Singapore (MAS), rose to 3.3% YoY – much higher than expectations of a 3% YoY rise. December’s core inflation was faster than the 3.2% YoY gain recorded in November.   We expect inflation to remain elevated in the near term, with Singapore implementing the second round of increase for the goods and services tax (GST). On top of this, a potential increase in global shipping costs due to issues on security at important shipping lanes could mean that inflation remains sticky in 2024.       Inflation comes in higher than expected, pointing to MAS keeping setting untouched     Faster inflation points to MAS standing pat MAS recently switched to conducting four policy meetings per year, with the first policy meeting for 2024 set for 29 January. With inflation accelerating more than expected and price pressures remaining elevated due to the implementation of GST and potential spikes in global shipping costs, we expect the MAS to retain all policy settings at its upcoming meeting. Furthermore, we believe the MAS will likely want to retain their hawkish bias until they are convinced that core inflation will remain under control.  

Asia Morning Bites The Bank of Japan (BoJ) meets to decide on policy today and is widely expected to retain its yield curve control (YCC) policy. Singapore will report CPI inflation while South Korea will release data on PPI inflation.   Global Macro and Markets Global markets:  Monday was a quiet day for US Treasuries. The 2Y UST yield rose 0.7bp while the 10Y yield fell slightly by 1.7bp to 4.105%. The USD made slight gains against the EUR, taking EURUSD down to 1.0881. The AUD was also weaker, falling to 0.6566, though both Cable and the JPY held their ground. Asian FX was mostly a shade weaker against the USD. The PHP and THB propped up the bottom of the table. At the other end, the TWD made small gains taking it to 31.344. US stocks clawed their way higher with a new record for the S&P 500 of 4850 after a modest 0.22% gain. The NASDAQ also made a slight gain of 0.32%. US equity futures don’t seem to have a strong view on today’s open. Chinese stocks had another bad day. The Hang Seng fell 2.27% while the CSI 300 fell 1.56%. G-7 macro:  There was nothing of note in the G-7 macro calendar yesterday, and there isn’t much going on today either. UK public finance data precedes the US Richmond Fed business survey. The Bank of Japan is also meeting (see more below). Japan:  Most forecasters expect that the Bank of Japan (BoJ) will maintain its ultra-loose monetary policy today. Consequently, the market’s attention will be focused on what Governor Ueda thinks about inflation and wage growth and whether he will give any hints of policy change in the near future. The market will probably be disappointed again because we don’t believe that Ueda will give a clear signal of policy normalization in the near future. He may, however, sound more dovish than in the past, given the recent slowdown in inflation. The government renewed its utility subsidy program, so we expect the BoJ to revise down its FY2024 inflation outlook in today’s quarterly macro-outlook report. Singapore: December inflation is set for release today.  The market consensus points to inflation dipping to 3.5% YoY (from 3.6% previously) while core inflation may inch lower to 3.0% YoY from 3.2% YoY in November. Despite the slight deceleration, the MAS is widely expected to retain policy settings at the 29 January meeting, remaining wary of potential flare-ups in inflation while also looking to support an economy facing a challenging global trade environment.   What to look out for: BoJ decision and Singapore inflation South Korea PPI inflation (23 January) Singapore CPI inflation (23 January) Australia business confidence (23 January) Taiwan industrial production (23 January) BoJ policy meeting (23 January) US Richmond Fed manufacturing index (23 January) Australia Westpac leading index (24 January) Japan trade balance and Jibun PMI (24 January) Malaysia BNM policy (24 January) US MBA mortgage applications (24 January) South Korea GDP (25 January) Japan department sales (25 January) ECB policy meeting (25 January) US GDP, durable goods orders, initial jobless claims, new home sales (25 January) Japan Tokyo CPI inflation (26 January) Philippines trade (26 January) Singapore industrial production (26 January) US PCE deflator, pending home sales and personal spending (26 January)

Rates Spark: Near-term balance of risks still tilted towards higher rates Markets are geared for dovish outcomes this week, not just in rates where still notable probabilities are discounted for first cuts as early as March, but also across wider risk markets. This sets up markets for disppointments if they don't get exactly what they want. Data is a wild card, but the ECB will have this in mind if it is earnest about pushback.   Near-term balance of risks still tilted towards higher rates The thought of a soft landing actually materialising against all odds are supporting risk assets in all corners of the market. The S&P 500 closed at new record levels on Friday and also on Monday the equities rally pushed on through. In rates the pricing in of a soft landing has pushed down rates along the curve at the start of the week, supported by the idea that inflation is coming down as markets are eyeing this week’s PCE data. But markets are starting to fine-tune their expectations more in line with our thinking, even if we see more scope for correction in this direction: pricing for a March Fed cut is now down to 10bp, even though overall pricing for cuts this year has even deepened somewhat again to 134bp. Even though we also see inflation coming down steadily, we warrant caution about markets still getting ahead of themselves – especially in EUR rates. The European Central Bank will meet on Thursday and we expect a reiteration of their data-dependent path towards policy normalisation. Last week yields came down the day that Lagarde hinted at rate cuts in the summer. The best that markets can hope for is a reiteration of that comment, but given the guarded fashion of Lagarde’s statements we can see a scenario where she does not repeat this dovish message in the context of the policy meeting this week. We therefore see a chance that EUR 2Y rates will recalibrate higher again in response to the press conference when markets don’t get exactly what they are looking for. In the US there is also no guarantee that the nudge lower in rates we saw at the start of this week will extend. Markets have their eyes on a 2.0% core PCE inflation, in line with the Fed’s mandate that will be published on Thursday, which, if met, would keep the market pricing of a March rate cut as a realistic scenario. If, on the other hand, the actual number were to exceed 2.0%, even by a bit, we could imagine the market reacting more sensitively to such a disappointment. Similarly, we would expect an asymmetric reaction to the GDP growth figures, which our economist expects to come in firm on Thursday. On balance, if data come in as expected the further downside is moderate, but at least near term the potential could still be larger.   Tuesday's events and market views Japan will kick-off this week's central bank meetings but no change of the policy rate is expected. In terms of economic data releases Tuesday will be another light day. The EU Commission will publish the consumer confidence index and the ECB will release results of its bank lending survey. In the US we a few business indicators from regional Feds. It is the rest of the week will be of more interest, with eurozone PMIs on Wednesday, the ECB meeting and US GDP data on Thursday followed by the PCE on Friday. In primary markets Germany will sell 4Y and 30Y green bonds while the Netherlands taps a 15Y bond. The US Treasury sells new 2Y notes. In SSAs the EU has mandated syndicated taps of existing 7Y and 30Y bonds, which should also be Tuesday’s business.

FX Daily: Central bank meetings and US GDP in focus FX markets start the week in quiet fashion. The highlight this week will be central bank meetings in many parts of the world, including Japan and the eurozone. No major changes are expected in developed market monetary policy, but decent fourth quarter US GDP data could see US interest rates back up a little further, keeping the dollar supported.   USD: Dollar can stay supported The dollar looks to be trading in a supported fashion. This year's backup in short-term rates has reined in some of the pro-risk sentiment that dominated markets late last year. This backup in rates has largely been driven by central bankers saying they are in no rush to cut rates. After the informal commentary seen over recent weeks, this week will start to see the formal communication as central banks meet in Japan (Tuesday), Canada (Wednesday), and the eurozone and Norway (Thursday). Like many, we think the earthquake in Japan makes it too early for the Bank of Japan (BoJ) to unwind its Yield Curve Control this week. In fact, there have been surprisingly few source stories ahead of this particular meeting, even though we will see a crucial set of new forecasts for prices and activity. Assuming the BoJ springs no surprise, USD/JPY should continue to hover around 148. For the dollar this week, our macro team forecasts above-consensus fourth quarter GDP on Thursday. This could see the market further pare back Federal Reserve easing expectations this year. The market currently attaches a 43% chance of a cut in March and an easing cycle this year now worth 115bp. An interesting aside. Some US banks are proponents of the March Fed cut because the Fed will probably not be renewing its Bank Term Funding Programme in early March. Currently, it seems that some US banks are using the facility to borrow cheaply (4.87% p.a.) and park money at the Fed (5.30%). The thinking goes that a rate cut in March could smooth funding conditions for the regional banks. We do not subscribe to this view and maintain a call for the first rate cut in May. Beyond the US GDP data this week, Friday sees December personal consumption data, where the deflator is again seen at 0.2% month-on-month. This could deliver a benign end to the week. In all, we would say it looks like a range-bound week for the dollar where DXY could trade out something like a 103-104 range. That will continue to see the market interested in carry, and we note that the Turkish lira and the Indian rupee have still managed to deliver year-to-date total positive returns against the dollar – in a broadly bid dollar environment.

Bank of Canada preview: Too early for a radical pivot Core inflation came in hotter than expected in December which rules out the Bank of Canada shifting meaningfully in a dovish direction at the January meeting. However, higher interest rates are biting and we continue to look for rate cuts from the second quarter onwards. US-dependent BoC rate expectations and the Canadian dollar may not move much for now.   Hot inflation warrants caution before dovish turn The Bank of Canada is widely expected to leave the target for the overnight rate at 5% when it meets next week. Policymakers continue to talk of their willingness to “raise the policy rate further if needed”, and inflation does indeed continue to run hotter than the BoC would like, but we see little prospect of any additional policy tightening from here. Instead, the next move is expected to be an interest rate cut, most probably at the April meeting. The latest BoC Business Outlook Survey reported softening demand and “less favourable business conditions” in the fourth quarter with high interest rates having “negatively impacted a majority of firms”, leading to “most firms” not planning to “add new staff”. Job growth does appear to be cooling and the Canadian economy contracted in the third quarter and is expected to post sub 1% growth for the fourth quarter. Also remember that Canadian mortgage rates will continue to ratchet higher for an increasing number of borrowers as their mortgage rates reset after their fixed period ends. This will intensify the financial pressure on households, dampening both consumer spending and inflationary pressures. Unemployment is also expected to rise given the slowdown in job creation and high immigration and population growth rates. Given this backdrop, we expect Canadian headline inflation to slow to 2.7% in the first quarter and get down to 2% in the second versus the consensus forecast of 2.6%. As such, we see scope for the BoC to cut rates by 25bp at every meeting from April onwards – 150bp of interest rate cuts versus the consensus prediction and market pricing of 100bp of policy easing.   Rate expectations in US and Canada   Fighting market doves is still hard Markets currently price in 95/100bp of easing by the Bank of Canada this year. As shown in the chart above, the pricing for rate cuts in the US and Canada has followed a very similar path. The implied timing for the first rate cut is also comparable: May for the Fed (March is 50% priced in), June for the BoC (April is 45% priced in). That is despite the communication by the Federal Reserve which has already pivoted (via Dot Plots) to the easing discussion while the BoC officially still retains a tightening bias. In practice, even if the BoC chooses – as we suspect – to delay a radical dovish pivot and stay a bit more hawkish than the Fed, pricing for the BoC will not diverge too much from that of the Fed. So, the room for a rebound in CAD short-term rates appears more tied to USD rates than BoC communication.     FX: USD/CAD to stabilise In FX, the story isn’t much different. The Canadian dollar has been a de-facto proxy for US-related sentiment, acting less and less as a traditional commodity currency – that would normally be hit by strong US data – thus outperforming the rest of high-beta G10 FX since the start of the year. The rebound in USD/CAD to 1.35 is in line with a restrengthening of the USD primarily due to risk sentiment, positioning and seasonal factors, rather than a divergence in Fed-BoC policy patterns. In fact, the USD-CAD two-year swap rate gap has widened further in favour of CAD so far in January, from 20bp to 32bp.   We expect the impact on CAD from this BoC policy meeting to be modestly positive as expectations of a radical dovish shift are scaled back. However, Governor Tiff Macklem already introduced the idea of rate cuts in a speech this month and will need to acknowledge the downward path for the policy rate to a certain extent. While waiting for the Fed meeting a week later and the crucial US CPI numbers for January, US-dependent rate expectations in Canada may not move much. USD/CAD may trace back to 1.34, but we don’t see much further downside for the pair this quarter as USD shows the last bits of strength.    

UK inflation set to shift focus to Bank of England rate cut timings  By Michael Hewson (Chief Market Analyst at CMC Markets UK)     It was another poor day for European markets yesterday, with the return of US markets unable to lift the mood, as they too finished lower, due to a continuation of the hawkish rhetoric employed by central bankers this week as they pushed back on rate cut expectations which in turn helped to push yields as well as the US dollar sharply higher.   The weak finish in the US looks set to see European markets open lower in the wake of a softer Asia session after China Q4 GDP came in slightly short of expectations at 1%. The other metrics for industrial production were slightly better for December, rising 6.8% while retail sales slowed from 10.1% to 7.4%, falling short of forecasts of 8%.   The last few days have seen several ECB policymakers pour cold water on the idea of early rate cuts even in the face of a European economy that is on its knees. Even the head of the German Bundesbank, Joachim Nagel was in no mood to compromise despite a German economy that contracted by -0.3% last year and is predicted to struggle again this year. With the Federal Reserve set to meet in 2 weeks' time there was some hope that Fed Governor Christopher Waller would echo the tone of Powell's post December meeting press conference in talking up the idea of US rate cuts.   This had all the hallmarks of being a triumph of hope over expectation and so it proved with Waller pushing back on market pricing of 6 rate cuts this year, as if he was going to do anything else with the Fed dots showing 3 rate cuts.   His comments that rate cuts ought to be done methodically and carefully, and in a calibrated fashion, spoke to a central bank that is no rush, and that rapid cuts are not necessary. This approach tends to push back on the idea of a March cut, and that the central bank will be very much data dependant.   The fact is that whatever the market may like to think about a Fed cut in March, the pricing risk is very much to the downside, and them not cutting, which suggests the risk of a further squeeze higher in yields.  This caution from the likes of the ECB as well as the Fed this week is likely to be echoed by the Bank of England when it looks at this week's economic data, after the latest UK wages data slowed to 6.6% in November. While this was in line with forecasts there were some who suggested it supported the idea of an early rate cut. This seems unlikely with today's December inflation numbers unlikely to show a significant enough slowdown to support the idea of a rate cut much before the end of Q2, although that's unlikely to stop markets trying to go down that rabbit hole. It is true that headline inflation in the UK has more than halved since March last year slowing from 10.1%, with November slowing more than expected to 3.9%, prompting speculation that the Bank of England might be closer to cutting rates in 2024 than had been originally priced. While a further slowdown in inflation is to be welcomed and today, we can expect to see 3.8% for December, most of it has been driven by the falls in petrol prices over the past few weeks. Inflation elsewhere in the UK economy is still much higher although even in these areas it has been slowing.   Food price inflation for example is still much higher, slowing to 6.6% in December, while wages as we saw yesterday are still over 3 times the Bank of England inflation target. Services inflation is also higher at 6.3%, and expected to slow to 6.1% in December, while core prices rose at 5.1% in the 3-months to November and may slow to 4.9% today. It's also worth keeping an eye on PPI as we could see a modest pickup in today's numbers. While the economic data this week is likely to be a key bellwether for the timing of when the Bank of England might look at starting to reduce the base rate, the key test for markets won't be on whether we see a further slowdown in inflation at the end of last year, but how much of a rebound we see in the January numbers. Whatever markets might look to price as far as rate cuts are concerned the fact that wages are still trending above 6% is likely to stay the Bank of England's hand when it comes to looking at rate cuts when they meet in just over a fortnight. It's also important to remember that at the last rate meeting 3 members voted for a further 25bps rate hike. While a further slowdown in the headline rate is likely to prompt a change of heart when it comes to calling for a rate hike, it will take more than a further slowdown in the headline rate for these 3 MPC members to do a complete 180 about turn and push for a rate cut.          EUR/USD – currently looking soft with the failure to move through 1.1000 risking the prospect of a move back to the 200-day SMA at 1.0830. This is the next key support with a break of 1.0800 targeting 1.0720. The main resistance remains at 1.1000.  GBP/USD – needs to get above the highs last week at 1.2800 to maintain upside momentum. Currently looking soft with the main support at 1.2590/1.2600, and below that at the 200-day SMA at 1.2540. We need to hold above here to keep upside momentum intact or risk a slide to 1.2250. EUR/GBP – currently holding above trend line support just above the 0.8570/80 area, while we have resistance at the 0.8620/25 area last week. Need to see break either side to signal the next move, with further resistance at 0.8670 and the main support at the December lows at 0.8545. USD/JPY – pushed above the 50-day SMA and the highs last week at 146.40 and looks set for a move towards 148.50. Support now comes in at the 146.30/40 area. FTSE100 is expected to open 53 points lower at 7,505 DAX is expected to open 103 points lower at 16,468 CAC40 is expected to open 50 points lower at 7,348

The consensus view in 2024 is that the dollar will decline. We agree but suspect that a back up in short-term rates and seasonal patterns could frustrate dollar bears through the first quarter. The second quarter should see a re-acceleration of the dollar bear trend as the Fed prepares to pull the trigger on its first rate cut.   As outlined in our 2024 FX Outlook, we expect a broader dollar trend to become more apparent through the second quarter as lower US rates unleash portfolio flows more broadly to the Rest of the World. Of course, geopolitical risks remain. It is not in our baseline view, but a major escalation in the Middle East and another energy supply shock would see the dollar outperform at the expense of Europe and Asia. To the forecasts. We retain a 1.15 end year forecast for EUR/USD but see range trading in the near term. While a re-assessment of the aggressively priced European Central Bank easing cycle could in theory be positive for the euro, a deteriorating investment environment could well curtail any sizable near-term gains in EUR/USD and other risk-sensitive currencies. The Japanese yen could well be an outperformer if, as our team thinks, the Bank of Japan does significantly shift policy in April. And sterling could prove something of a dark horse. We are currently mildly bearish sterling on the view that the Bank of England cuts rates 100bp. However, looser UK fiscal policy could keep sterling better supported. Across the EM space, easing cycles continue in parts of EMEA and Latam. Patience is again advised for the rally in CEE currencies. And China will continue to hold Asia FX back.

Industry continues to decline in the eurozone, and the outlook is bleak The industrial production decline of -0.3% confirms the steady downward trend and adds to expectations of another contraction in eurozone GDP in the fourth quarter of last year. The outlook for industry remains bleak for the months ahead.   Eurozoeon Industrial Production dropped for the third month in a row in November, broadly continuing the trend of contraction in output. Production is now 7.2% lower than it was in September 2022. This means that industry will continue to weigh on economic activity in the eurozone, clearly performing much weaker than services. The eurozone economy experienced negative growth in the third quarter and could well have seen another quarter of negative growth in 4Q too. The industrial figures at least point to that. The outlook for eurozone industry remains pretty bleak at this point, according to surveys. New orders continue to deteriorate, albeit at a slower pace than a few months ago. And while producers are getting slightly more upbeat, we do not expect that a real turning point in production is likely in the coming months. And any input shortages coming from the Red Sea disruptions won't help. More importantly, demand would need to return and there is still very little evidence of that in the current weak global economy.  

What's really going on with Australian inflation A sharp drop in November inflation is encouraging thoughts of RBA easing by May, with more rate reductions by the end of the year. We think this is unlikely. Indeed, it is easier to make the case for further hikes.   Where we are right now The November inflation release showed a further decline in the headline inflation rate to 4.3% YoY, a sharp drop from the 4.9% rate achieved in October and also a little lower than the consensus estimate of 4.4%. On the day, there was some weakness in the AUD as the market took the numbers as corroboration for their fairly entrenched view that the Reserve Bank of Australia has finished hiking rates and was well on the way to easing.   But we're not totally convinced. And we're going to outline why the inflation data isn't as good as it may look at first glance. In doing so, we will at least raise some doubt about the view that rates have peaked. We think they may have, but a residual upside risk still exists, which could also help support the Aussie dollar. So, what happened in November? We prefer to start any analysis of inflation from the perspective of the CPI index, how it's changing month-on-month, and only then what this means to the annual year-on-year inflation rate. That means that fluctuations in the price level a year ago are given a fair chance to affect the inflation rate but have little or no bearing on what the price level is doing now, and we can focus more on monthly fluctuations and their trend run-rate (in practice, the annualised 3m and 6m rates). That also gives us more of a forward look at what we may expect in the coming months. The month-on-month rate for CPI in November came in at 0.33%. If that were repeated for 12 months, it would deliver just over 4% inflation. Fortunately, the trend is not quite so high. The 3m annualised rate is only 2.3%, but this incorporates the 0.33% MoM decline in October, which will drop out of the trend once January data is available and so will probably push higher again. The 6m annualised figure, which dilutes single-month spikes and dips more than the 3m trend, is still running at 4.2% - way above the Reserve Bank of Australia's 2-3% target. Australian annualised CPI %, 3m and 6m

German economy shrank in 2023 Now it's official. The German economy shrank by 0.3% year-on-year in 2023. What's worse, however, is that there is no imminent rebound in sight and the economy looks set to go through the first two-year recession since the early 2000s. The year 2023 was the first full year since 2020 in which the German economy contracted. According to a just-released preliminary estimate by the German statistical office, the economy shrank by 0.3% year-on-year. Based on a very tentative first estimate, the economy shrank by 0.3% quarter-on-quarter in the fourth quarter of 2023. However, don't forget that this estimate was derived without any hard economic data for the month of December and could still be subject to revisions, probably rather to the downside than the upside.   We expect the German economy to shrink again in 2024 The year 2023 was another turbulent one, with the economy in permanent crisis mode. In fact, since 2020, there has been a long list of crises and challenges facing the German economy: supply chain frictions resulting from the pandemic lockdowns and war in Ukraine, an energy crisis, surging inflation, tightening of monetary policy, China’s changing role from being a flourishing export destination to being a rival that needs fewer German products, and several structural shortcomings. A combination of geopolitical risk events, cyclical headwinds but also homemade deficiencies. In light of so many challenges, some take comfort in the fact that the economy is “only” stuck in stagnation and has avoided a more severe recession. And, indeed, things could have been worse. But this should be no reason for any complacency. On the contrary, even if the worst of the weakening in sentiment seems to be behind us, the hard economic reality does not look pretty. In fact, looking ahead, at least in the first months of 2024, many of the recent drags on growth will still be around and will, in some cases, have an even stronger impact than in 2023. Just think of the still-unfolding impact of the European Central Bank's monetary policy tightening, the potential slowing of the US economy, new uncertainty stemming from recent fiscal woes or new supply chain frictions as a result of military conflict in the Suez Canal. A recent illustration of the longer-term impact of energy prices, higher interest rates and changing economic structures is the gradual increase in insolvencies since mid-2022. On a more positive note, what could lift economic sentiment and growth are positive real wage growth, a rebound in Asia and further down the road some rate cuts from the European Central Bank. Also, a turn in the inventory cycle could bring some relief in early 2024, although this turn has not yet happened and would probably only be short-lived. All in all, we expect the current state of stagnation and shallow recession to continue. In fact, the risk that 2024 will be another year of recession is high. We expect the German economy to shrink by 0.3% YoY this year. It would be the first time since the early 2000s that Germany has gone through a two-year recession, even though it could prove to be a shallow one.

WASDE update: Higher US corn and soybean supplies The USDA released a fairly bearish WASDE report on Friday with US ending stocks for both corn and soybeans coming in above expectations.   Record US corn production The USDA revised up its 2023/24 US corn production estimates by 108m bushels to a record 15.34bn bushels due to higher yields. This was above market expectations of around 15.22bn bushels. The yield estimates were increased by 2.4bu/acre to 177.3bu/acre. As a result, US ending stocks for 2023/24 were increased to 2.2bn bushels, up 31m bushels from the previous estimate, and above the roughly 2.1bn bushels the market was expecting. For the global balance, 2023/24 ending stock estimates were revised up from 315.2mt to 325.2mt primarily due to larger supplies. The market was expecting a number closer to 313mt. Global corn production estimates rose by 13.7mt to 1,235.7mt, driven by an increase in the US (+2.7mt), and China (+11.8mt). Revisions to both the US and global balance were bearish, which is well reflected in the price action following the release.       Corn supply/demand balance   US soybean stocks rise The USDA raised 2023/24 US soybean production estimates from 4,129m bushels to 4,165m bushels with yields revised up from 49.9 bushels/acre to 50.6 bushels/acre. As a result, ending stock estimates for 2023/24 were increased by 35m bushels to 280m bushels. This was quite a bit higher than expectations of around 245m bushels. Only marginal changes were seen in the global balance, which meant that global soybean ending stocks for 2023/24 increased by just 0.4mt to 114.6mt. Global production estimates were largely left unchanged at around 399mt as gains in Argentina, the US and Paraguay were offset by revisions lower in Brazilian supply. Overall, larger-than-expected ending stocks in the release were bearish for the soybean market.   Soybeans supply/demand balance   Global wheat stocks edge higher The USDA decreased its US ending stocks estimate for 2023/24 from 659m bushels to 648m bushels following a reduction in beginning stocks. This was lower than market expectations of around 659m bushels. Meanwhile, the agency left production and export estimates unchanged at 1.8bn bushels and 725m bushels, respectively. For the global market, the USDA increased its 2023/24 ending stocks estimate from 258.2mt to 260mt, largely on account of higher stocks at the start of the year. The market had largely expected global ending stocks to remain roughly unchanged. The agency revised up its demand estimates to 796.4mt from 794.7mt, driven by India (+1.3mt), and the EU (+1mt). However, higher demand estimates were offset by an increase in production estimates from 783mt to 784.9mt. This was due to increases from Russia (+1mt), Ukraine (+0.9mt), and Saudi Arabia (+1.5mt).   Wheat supply/demand balance

CEE: Sinking beacon of hope After a very busy calendar last week, this week we take a little break in the CEE region. The final December inflation numbers in Poland will be released today and core inflation tomorrow. We do not expect any changes in the headline rate and anticipate a drop in core from 7.3% to 6.9% year-on-year. On Wednesday, we will see PPI numbers in the Czech Republic, one of the last numbers before the February Czech National Bank meeting. Thursday will see the release of industrial production in Romania and PPI in Poland on Friday. Otherwise, we will continue to monitor the dynamic political situation in Poland. The state budget draft for this year will be discussed this week in parliament. In the Czech Republic, we are getting closer to that CNB meeting and we should hear more from the board in the next two weeks before the blackout period begins. After surprisingly low inflation for December, there is the possibility of a rate cut of 50bp instead of 25bp, which is our base case scenario here for now. CEE FX remains the last island of resistance within the EM space, which is under selling pressure this year. However, last week proved that the CEE region is not the exception and bearish sentiment has arrived here, too. The market is starting to price in more cutting than we expect, not only due to global direction but also inflation surprising to the downside. And even in Poland, where the central bank continues its hawkish tone, FX has not escaped losses. Despite the inflation surprise in the Czech Republic, we believe the koruna will remain resilient and should not go to the 24.700-800 range. On the other hand, Hungary's forint has been ignoring rapidly falling rates for some time, which we believe leaves HUF vulnerable, and we expect rather weaker levels this week above 380 EUR/HUF. Poland's zloty remains the only currency in the region supported by a higher interest rate differential. However, political noise seems to be entering the market and PLN is rather weaker. Therefore, we see EUR/PLN around current levels for the next few days despite positive market conditions.

GBP: Services inflation to stay above 6% The data flow picks up this week in the UK, with labour (Tuesday), CPI (Wednesday) and retail sales (Friday) statistics for the month of December being released. Services inflation is what matters the most for the Bank of England at the current stage and we expect to see it at 6.1% this week, considerably below the Bank of England's estimates. Despite the improvement in services disinflation, 6%+ remains too high and is unlikely to make the BoE endorse dovish rate expectations just yet. EUR/GBP can retest the 0.8573 lows, but we expect it to find a bit more support this week as the euro may benefit from some hawkish comments by Lagarde in Davos. Our medium-term view on the pair remains bullish.

EUR: Lagarde may sound more hawkish in Davos The data inputs for EUR/USD will mostly come from Germany this week, with 2023 GDP figures today and the ZEW survey tomorrow along with final CPI numbers. We have often discussed how European Central Bank rate cut expectations appear way too aggressive (150bp by year-end), although the dovish members of the bank have failed to deliver a coordinated pushback. Despite ECB hawks' protests against dovish expectations having had little impact on the market, the WEF event in Davos this week – which sees many ECB speakers including President Christine Lagarde – should not be overlooked. Lagarde has a greater potential to influence markets given a clearly divided Governing Council, and we suspect that she will opt for a more hawkish tone compared to last week’s comments. There may be some help for the euro coming from Davos, although we should be wary. Fed expectations have been resistant to data and the same could hold true for the ECB as well. The minutes from the December policy meeting are also released this week. We still think it is premature for EUR/USD to trade sustainably above 1.10. Elsewhere, Sweden published inflation figures today. CPIF declined to 2.3% from 3.6% (consensus 2.2%), although the core measure excluding energy remained high, slowing from 5.4% to 5.3% versus a consensus of 5.2%. Despite this, it remains unlikely that the Riksbank will tighten policy again. If anything, this modestly raises the chances that another round of FX sales will be started after the current reserve hedging programme ends in early February (in our view).

FX Daily: Waiting on central bankers to shake data-resistant markets Investors have cemented Fed easing expectations despite some hotter-than-expected US data. We suspect a market reluctant to price out rate cuts will need strong words from the Fed – perhaps Powell himself – to reconnect rate expectations with data. Meanwhile, USD may stay rangebound. This week, Lagarde will speak in Davos, and UK CPI should slow further.   USD: Rate expectations still disjointed from data The first half of January has shown a dislocation between rate expectations and data in the US. The two most important data points for the Federal Reserve, labour and CPI inflation figures, both came in hotter than expected. PPI was a bit softer than consensus on Friday, but that is not enough to justify markets’ reluctance to price out Fed easing. The Fed funds future curve prices in 21bp of cuts in March, and 168bp by year-end. Our view remains that the Fed won’t start cutting before May, and that the total easing package will be 150bp. Accordingly, the rally in short-term USD rates appears overdone, and weakness in the front part of the USD curve should support some recovery in the dollar. However, we suspect that the data may prove insufficient to trigger a USD rebound for now; the consensus view of a dollar decline later this year seems to be making investors keen to sell dollar rallies. Also, the Fed probably needs to send a clearer message that the latest data does not justify the kind of aggressively dovish view embedded in money market pricing. There are a few more Fed speakers lined up this week, but perhaps dollar bears will want to hear it from Fed Chief Jerome Powell, who is not scheduled to speak until the 31 January FOMC announcement. Incidentally, the US data calendar isn’t very busy this week. Retail sales and the University of Michigan inflation expectations will attract the most attention along with jobless claims - which came in well below expectations last week, reinforcing the narrative of a still-tight labour market. We think the dollar will be driven more by other events than data this week, barring major surprises. First, the results of the election in Taiwan have raised again the delicate question of Taipei-Beijing relationships, with tensions among the two seen as a major risk for Asian and global risk sentiment this year. The dollar might benefit from some outflows from exposed EM FX. The situation in the Gulf also looks rather volatile after the US and UK military operations last week, even though the impact on oil prices has been muted so far.   Domestically, we’ll monitor the market reaction to the business tax relief extension currently being discussed in the US Congress. The impact of fiscal support may turn out to be negative for risk sentiment – and positive for the dollar – as markets see a greater risk of sticky inflation and a lower chance of Fed rate cuts. We think the dollar is more at risk of a rebound than a further correction from these levels, although the chances of another rangebound trading week in FX (DXY still hovering in the 102/103 region) are high.

Unexpected dip in Indonesia imports results in wider trade surplus Indonesia's December trade report saw exports fall 5.8% YoY while imports fell unexpectedly.   Trade surplus widens after imports surprise on the downside December trade data showed exports falling although imports unexpectedly fell.  Exports were tipped to edge lower by 8.4%YoY but managed to fall by 5.8%YoY.  However, imports contracted by 3.8%YoY compared to forecasts for a 0.2% gain.   Exports were softer accross most sectors, with coal exports down 19.1%YoY. Palm oil shipments dropped 31.9%YoY.  Imports fell, with capital goods down 9.9% YoY although consumer imports rose 13.5% YoY, reflecting robust domestic consumption. The overall trade balance settled at $3.3bn, up sharply compared to expectations at $1.9bn. Despite the better-than-expected trade surplus, the gap remains well below the record high posted in 2022 and suggests waning support for the IDR.  With global trade likely to stay subdued in 2024, we can expect this trend to continue this year.   Trade gap widens, could suggest support for IDR   BI decision up next The wider than expected trade gap suggests that the IDR should still benefit from a current account surplus. Although the trade surplus was better than expected, it remains well-below the recent record high recorded in 2022.  With modest depreciation pressure on the IDR expected to persist in the near term, we believe BI will be inclined to keep policy rates untouched at 6% later this week.  Until we gain more certainty regarding the much-awaited Fed pivot, we could see BI retaining its current restrictive stance for most of the first half of the year to help support the currency, while also wary of a potential flare-up in food inflation due to the ongoing El Nino weather phenomenon.  

European markets finished a choppy week with a modest rebound, with the FTSE100 breaking a 3-day losing streak, although it still fell for the second week in succession having sunk to a 3-week low midweek. US markets also had a more positive week with the S&P500 briefly pushing above the 4,800 level for the first time in 2 years.    The catalyst for Friday's push higher was a downside miss in US PPI for December which pulled forward speculation yet again about central bank rate cuts, which helped pull the US 2-year yield to its lowest level since May last year.   We also saw similar sharp declines in UK and German 2-year yields as well, although the market enthusiasm and pricing for rate cuts isn't anywhere near as aggressive as it is for the prospect of a cut in US rates. This comes across as a little bizarre given that of all the major economies now the US appears to be in much better shape, and therefore in less need of the stimulus of a rate cut. Last week's PPI numbers served to overshadow a hotter than expected CPI figure which saw headline inflation in the US push up from 3.1% to 3.4%, the second time we've seen US inflation rebound from the 3% level since June last year.     This uncertainty suggests that markets could be jumping the gun when it comes to the likelihood of March rate cuts, and it is the 2-year yield where this is being priced most aggressively. With earnings season now under way in the US with the first set of Q4 bank results garnering a rather mixed market reaction, although there was nothing significant in the numbers to suggest that the US consumer was feeling the pressure from current interest rate levels. Today the US is off for Martin Luther King Day which means markets in Europe could well be more subdued than normal, and so far this year there hasn't been that much to get particularly excited about anyway. The markets already know that the Federal Reserve is done when it comes to further rate increases, and currently have six 25bps rate cuts priced in for this year. That seems rather a lot and is more than the three the Fed have in their dot plot projections.     Nonetheless while markets in Europe and the US have got off to an uncertain start, one index that hasn't is the Nikkei 225 which has raced out of the blocks, pushing up to its highest levels in 34 years and up over 5% year to date already, and in so doing has got people speculating whether we can see a return to those 1989 peaks of 38,957. This week the focus is set to be very much on the UK economy in the wake of Friday's better than expected November GDP numbers, which raised the prospect that the economy may have avoided a technical recession at the end of last year, as a rebound in services activity saw the economy expand by 0.3%. This week we get data for wages and unemployment for November, as well as December CPI and retail sales, all of which have the potential to shift the dial on the timing of a first rate cut from the Bank of England. With inflation still almost double the Bank of England's 2% target and wage growth still upwards of 7% the idea that the central bank would look at cutting rates much before the summer seems unlikely. That said many are suggesting that inflation could be back at 2% by April, however even if that were the case we won't find out until the middle of May when the numbers are released. Against this sort of backdrop, it would be unlikely if he Bank of England were to act on rates until it sees the whites of the eyes of a lower inflation rate, especially since at the last meeting we still had 3 members of the MPC voting for a hike. It's unlikely they will vote the same way in February but nonetheless they are unlikely to go from hiking to cutting with only one meeting in between unless the wheels come off in spectacular fashion.     EUR/USD – currently looking to move higher but needs to move above the 1.1000 area to signal further gains. Short term support still at 1.0875 and the 200-day SMA at 1.0830. A break above 1.1030 has the potential to target the December peaks at 1.1140. GBP/USD – currently finding resistance at the 1.2800 area last week, slipping back to 1.2690 but remains in the wider uptrend with support just above the 1.2600 area. We need to get above 1.2800 to target the 1.3000 area. EUR/GBP – ran out of steam at the 0.8620 area last week, although we also have resistance at the 0.8670 area. Still have support just above the 0.8570/80 area, with the main support at the December lows at 0.8545. USD/JPY – ran into resistance at the 50-day SMA at 146.40 last week. Support currently at the 200-day SMA now at 143.80. We need to push above last week's high above 146.40 to keep 148.00 in sight or risk a return to 140.00. FTSE100 is expected to open 11 points higher at 7,636 DAX is expected to open 65 points higher at 16,769 CAC40 is expected to open 19 points higher at 7,484

The Commodities Feed: US natural gas prices spike higher Spot US natural gas prices spiked higher on Friday on the back of cold weather across large parts of the US. Meanwhile, tensions in the Middle East remain elevated following US and UK airstrikes in Yemen last  Energy- US natural gas prices spike higher The oil market saw a fairly choppy trading session on Friday with ICE Brent trading within a US$2.79/bbl range. Brent briefly broke above US$80/bbl amid ongoing tension in the Middle East, specifically the Red Sea, following US and UK airstrikes against the Houthis in Yemen. However, the market was unable to hold on to these earlier gains. While geopolitical risks are certainly building, we are still not seeing a reduction in oil supply as a result of developments in the region. But, the more escalation we see in the region, the more the market will have to start pricing in a larger risk of supply disruptions.   Speculators boosted their positions in ICE Brent over the last reporting week, increasing their net long by 38,905 lots, leaving them with a net long of 208,748 lots as of last Tuesday - the largest position they have held since October. The move was predominantly driven by fresh longs with the gross long increasing by 29,942 lots over the period. Speculators also increased their net long in NYMEX WTI, with the net long increasing by 21,799 lots to 111,129 lots as of last Tuesday. For WTI, the move was largely driven by short covering, with the gross short falling by 20,138 lots. European gas storage has now broken below 80% with colder weather over the last week seeing the largest daily withdrawals from storage so far this winter. However, storage remains above the 5-year average of 68% for this time of year. For now, we are still assuming that European storage will finish this heating season at around 52% full, which suggests limited upside for European gas prices. The US natural gas market has seen increased volatility in recent days and Friday saw a significant jump in spot prices. While front-month Henry Hub futures settled almost 7% higher on Friday, spot prices jumped more than 300% to over US$13/MMBtu due to freezing weather conditions across large parts of North America. Colder weather will lead to stronger heating demand. But there are also supply risks. Freezing conditions expected in Texas could lead to disruption to natural gas infrastructure. Front-month futures have given back a lot of Friday's gains in early morning trading today. There is plenty on the energy calendar this week. On Wednesday, China will release its industrial production numbers for December, which will include output data for crude oil and refinery activity. OPEC will also release its latest monthly market report on the same day, which will include its 2024 outlook for the oil market. On Thursday, the International Energy Agency will release its latest oil market report, while China will release its second batch of trade data, which will include more detailed energy trade numbers. Also, given today is a public holiday in the US, the usual weekly inventory numbers from the API and EIA will be delayed by a day.   Agriculture – larger US corn and soybean supplies The USDA revised up its 2023/24 US corn production estimates by 108m bushels to a record 15.34bn bushels on account of rising yields. As a result, ending stocks are now projected to hit 2.2bn bushels, up 31m bushels from previous estimates. For the global balance, 2023/24 ending stock projections were revised up from 315.2mt to 325.2mt primarily due to larger supplies. Global corn production was revised up by 13.7mt to 1,235.7mt, with supply increases from the US (+2.7mt), and China (+11.8mt). For soybeans, the USDA raised its 2023/24 US production estimate from 4,129m bushels to 4,165m bushels, on the back of stronger yields. Ending stock estimates were revised up by 35m bushels to 280m bushels as a result. Given marginal adjustments in global production and usage compared to last month, ending stock projections for 2023/24 increased by just 0.4mt to 114.6mt. The USDA decreased its US wheat ending stocks estimate for 2023/24 from 659m bushels to 648m bushels following a reduction in beginning stocks. For the global wheat market, the USDA increased 2023/24 ending stock estimates from 258.2mt to 260mt, largely on account of higher stocks at the start of the year. Global wheat production estimates were increased by around 1.9mt to 784.9mt. In addition to the WASDE monthly update, the USDA also released its quarterly grains stocks report which showed that US corn and soybean stocks stood above market expectations as of 1 December 2023. US corn stocks totalled 12.2bn bushels, up 12.5% YoY and above market expectations of 12bn bushels. Meanwhile, US soybean stocks came in at 2.99bn bushels, down 0.7% YoY, but higher than the average market expectation of 2.97bn bushels. Finally, for US wheat, stocks were up 7.5% YoY to total 1.4bn bushels, largely in line with market expectations of 1.39bn bushels.

Asia Morning Bites China 1Y MLF rates and Indonesia trade data are due today. Markets are digesting the Taiwan election results..   Global macro and markets Global markets:  US Treasury yields lurched lower again on Friday, and with little on the data calendar, this was probably a reaction to Middle East developments as well as perhaps some precautionary positioning ahead of Taiwan’s election. 2Y yields fell 10.1bp, and fell to 4.144%. There was less movement at the back end. 10Y yields fell just 2.7bp to 3.939%. Raphael Bostic suggested that further progress on reducing inflation was likely to be slow and cautioned against cutting rates too early. EURUSD hasn’t responded yet to the lower yield environment and edged a bit lower to 1.0947, which is consistent with a market that has become more risk-averse. G-10 currencies were not much changed. The AUD lost a little ground. But Cable is fractionally higher, and the JPY is also a little stronger at 145.03. The APAC region has also not shown much movement outside some weakness of the VND. USDCNY is currently at 7.1675. US equities had another flat day on Friday. Both the S&P 500 and NASDAQ were more or less unchanged.  Chinese stocks were slightly lower. The Hang Seng and CSI 300 both fell 0.35%.   G-7 macro:  Friday was pretty quiet on the macro front within the G-7. UK activity data was quite mixed, but there was a slightly better set of trade figures which may have helped sterling a little. US PPI for December was a little lower than expected which may have helped to encourage bond yields lower. Today there is nothing of note from the G-7.   Taiwan: As noted earlier, Taiwan re-elected a DPP President, and William Lai Ching-te was elected to the top job marking a third consecutive term for a DPP Presidency. Turnout was good, at 72% and President Lai received just over 40% of the vote. The more China-friendly KMT party got 33.49% of the vote, and the TPP got 26.45% of the vote.  It wasn’t all good news for the DPP though. The Legislative Yuan (parliament), which the DPP held in a narrow majority of its 113 members before the election, dropped to 51 seats, one less than the KMT, with the TPP picking up three seats taking their total to 8. This will make it harder for the DPP to pass new policies. Besides some slightly provocative language from both sides of the Strait of Taiwan, there don’t appear to be any reports of anything more tangible as yet.   China: Ahead of the activity data deluge later this week, China decides on its 1Y MLF rates today. Even though the CNY is still looking quite soft at 7.16-7.17, the consensus has pencilled in a 10bp cut of the rate from 2.5% to 2.4%. This follows some soft money supply figures at the end of last week.    Indonesia: Indonesia reports trade figures today. Exports will likely remain subdued because of soft global demand but imports are tipped to show a modest gain due to capital goods imports. This should keep the trade balance in surplus, though the market consensus has the surplus slipping to roughly $1.9bn. A smaller trade surplus would mean less support for the currency which could prompt BI to hold rates at 6% for longer.   What to look out for: China lending rate and Indonesia trade China new loans CNY (9-15 January) Japan M3 and tool orders (15 January) China medium-term lending rate (15 January) Indonesia trade data (15 January) India trade data (15 January) Philippines remittance data (15 January) Australia Westpac consumer confidence (16 January) Japan PPI inflation (16 January) US empire manufacturing (16 January) Singapore NODX (17 January) China GDP, industrial production, retail sales (17 January) Indonesia BI policy (17 January) US retail sales, industrial production and the Fed’s beige book (17 January) Fed’s Waller speaks (17 January) Japan core machinery orders (18 January) Australia labor data (18 January) Japan industrial production (18 January) US initial jobless claims, housing starts and building permits (18 January) Fed’s Williams and Bostic speak (18 January)

National Bank of Romania review: Not in a dovish mood yet As expected, the National Bank of Romania (NBR) kept its policy unchanged at 7.00% for the time being, welcoming the lower-than-expected inflation at the end of 2023 but not coming out with dovish hints just yet. The NBR opted to stand pat again with its policy stance and did not provide much new to chew on in its press release either. The Bank’s statement on the inflation rate resuming its downward trajectory after the January 2024 acceleration “on a lower path than that shown in the November 2023 medium-term forecast” is a rather neutral statement since the well-behaved price pressures of year-end 2023 naturally pull down the entire profile ahead. Moreover, the NBR attributed the subsequent fall of inflation (after the tax hikes get incorporated by firms) to supply side factors primarily – namely disinflationary base effects and downward corrections in agri-food commodity prices and crude oil prices. What stood out was rather the Bank’s stronger tone on the fiscal stance needed to keep the pressures stemming from the budget deficit in check. The wording on uncertainties and risks was changed from ‘’notable’’ to ‘’significant’’. Moreover, with the 2024 budget out and further clarity on the expenditures ahead, the NBR mentioned the possibility of an even higher tax burden, a possibility that is also in our scenario.   All told, we expect the first dovish hints at the 13 February meeting, when a new inflation report will also be published. As discussed above, we also expect the Bank to lower its inflation profile. We also think that the dovish hints to come will be, at least partially, counterbalanced by the caution against the strong annual wage increases which are likely to persist this year. We foresee the first rate cut in May, although April is equally likely if firms choose a more cautious pricing strategy in early 2024.

New inefficiencies but trade unlikely to be derailed Global trade has entered a phase of low growth following economic headwinds, geopolitical tensions and increasing protectionism. Trade growth may even lag global GDP growth for longer than expected. Trade patterns have also been disrupted over the last two years following sanctions on Russia, which led to big shifts in imports and exports of commodities and vessels sailing longer routes, especially in tanker shipping. Current detours add to already historically long routes in trade and introduce new inefficiencies. Falling container rates have long been positive for trade since 2022, and current increases reverse some of that, but as mentioned previously rates and ocean timelines for shipments are nowhere near peak levels. Shippers are looking into options for shift sourcing and nearshoring to reduce risk, but we’ve also seen that (underlying) interdependencies remain strong and companies continue to trade if potential benefits surpass costs. All in all, we stick to our forecast that merchant trade will grow 2.5% year-on-year in 2024 compared to the low competitive base of 2023.  

Container liner profitability expected to recover in 1Q Only part of the price increases can be attributed to higher fuel and wage costs, which means container liners will benefit from the sudden mismatch and imbalances between demand and supply, as we have seen previously. Profits skyrocketed in 2021 and 2022. But container rates plummeted in 2022 and trended down over most of 2023, even dropping below pre-pandemic levels last autumn. With locked-in higher contract rates expiring, elevated profitability levels have been declining since the second half of 2022. This continued over 2023 with some liners approaching break-even in the third quarter and ZIM even encountering negative levels. With the current price hikes, profitability is likely to turn a corner, and we may see margin improvement either in the fourth quarter or by the first quarter of 2024.   Sinking margins of container liners will likely turn around in 1Q in wake of the Red Sea disruption Operational profit (EBIT) per container liner, per quarter

Shipping costs up again and delays hit consumer markets in subsequent months Container vessels predominantly carry finished consumer goods, and semi-finished products are most impacted by the disruption. An estimated 30% of the world’s traded consumer goods are shipped through the Suez route. Higher transport costs obviously raise costs for shippers, but how they are affected depends on specific contracts although surcharges may hit them even if they have term-contracts. Shipping costs usually make up a small fraction of total sourcing costs per product. For lower valued or voluminous products this could, for instance, make up around 5%. If prices double or triple, this raises total costs by 5 or 10%, but we’ve also just gone through a prolonged downward cycle after the pandemic highs. Unless the current disarray lasts longer than expected, the impact on consumer prices may be limited (for now). Mounting delays of detoured vessels arriving in ports are resulting in increased uncertainty for shippers and handling pressures at terminals. Delays could also spark port congestion and hit the turn-around trip as well as connected journeys. The disruption leads to short-term mismatches between supply and demand and imbalances in the availability of vessels, personnel, and empty containers, and this needs to balance out again. With the Chinese New Year approaching and vessels returning to Asia too late, leading to cancellations. This will likely impact most of the first quarter and potentially the second quarter as well. For time-sensitive deliveries not yet underway, shippers may opt for shipment through the air, but this is much more expensive.    Altogether, this could mean some products will arrive later on the shelves if stocks are depleted, as companies like IKEA have warned about. In any case, questions about reliability lead to challenges in terms of fulfilling demand on time, and it reminds shippers that building resilience in supply chains remains vital.

Tankers continue to sail, but the number is diminishing as risk of assaults comes at a cost Most tankers are continuing their journeys, but this doesn’t mean the tanker market is not affected by the threat of attacks on vessels. Spot rates, including those for very large crude carriers (VLCC) chartered on this route from the Persian Gulf, are under strain. And in the meantime, insurance market premiums for Red Sea crossings have surged. So different from what some may think, the Red Sea - Suez Canal shipping route isn’t blocked, but it is certainly increasingly affected.   Container rates on most effected Asia-Europe route more than tripled while the global average doubled Container spot rates on one of the largest and most affected global trade routes, Asia-Europe, have tripled compared to early December in the first week of January. This marks the provisional end of downward trending prices after earlier record-breaking levels during the pandemic. Spot rates, including surcharges on the Shanghai-Rotterdam route, reached $ 4,400 on 11 January compared to $1,170 at the start of December for a standardised 40-foot container. Most trade lanes across the world are indirectly affected, and global spot rates have doubled over the same period. Several US east coast-bound vessels from Asia have shifted away from the Panama Canal, which is suffering from a drought, and are now also impacted by the troubles in the Red Sea. This comes on top of already extended sailing times.     Container rates to Europe have risen rapidly since Red Sea troubles started World container index (WCI), freight rates in $ per FEU (40 ft container)   Container rates rebounded quickly and more may follow Container sport rates have gone up rapidly following the capacity disruption and rates may go up even further. But we are still far away from the record-breaking levels of early 2022. Current spot prices still hover below half of this peak for the Shanghai – Rotterdam route. A complicating factor for the market is that the world simultaneously faces another chokepoint –  the Panama Canal – also a vital link for trade, and the coinciding Chinese New Year may lead to extra friction this year. But on the other hand, demand for goods is running far less hot than over the pandemic, and with a range of new-build vessels online and still underway there’s much more capacity available. In addition, port operations are generally also running relatively smoothly.   Red sea crisis in a different category for shipping than the pandemic disruption The current market balance of supply and demand is less strained than when Evergiven blocked the Suez Canal in 2021, which should limit the upside for container rates. Having said that, the impact ultimately depends on how long it takes to resume shipments. Rebalancing takes time as we have seen before. If extreme weather events add to the disarray, elevated freight rates could easily be around for longer. But the current disruption also masks underlying overcapacity following a massive inflow of vessel capacity. When the most pressing Red Sea disruption is resolved we can gradually expect renewed downward pressure.     Mounting surcharges complicate the market The container shipping sector is subject to various surcharges on top of base freight rates and several of them, including the bunker adjustment (BAF) and from this year the Emissions surcharge (EMS) are covered by clauses in contracts. But the list of surcharges has continued to expand in response to several events in the last few years. Port congestion surcharges (PCS) were introduced over the pandemic and amid the current Red Sea crisis, container liners have implemented ‘transit disruption charges’ (TSD). This extra fee, combined with a peak season surcharge ahead of the Chinese New Year (PSS), has pushed up container rates. These fees differ among container liners but have become a dominant factor in pricing. Consequently, container transport pricing has turned increasingly opaque and hard to predict for shippers and logistics services providers.    

Red sea shipping disruption rages on and the impact will continue well into 2024 The Red Sea shipping crisis is still growing as almost half of vessels have been rerouted around the Cape of Good Hope in January. This has already more than tripled container rates, and delays and knock-on effects may drag on to the second quarter.   No quick fix for Red Sea shipping risks, impact potentially drags on to 2Q 2023 ended with new disruptions for trade and supply chains following the security crisis in the Red Sea and there’s no end in sight yet. To avoid Houthi militant attacks on their vessels in the Gulf of Aden and the Red Sea, shipping companies and their clients continue to avoid the major Suez Canal route - handling some 12% of global trade - and are rerouting their vessels around the Cape of Good Hope. Sailing around the Cape saves Suez Canal fees but adds some 3,000-3,500 nautical miles (around 6,000 km) to the journeys connecting Europe with Asia. At a speed of 14 knots, this means over 10 days is added to the length of the trip, potentially running up to two weeks. The disruption has raged on for almost four weeks now, and the US-led naval operation ‘Prosperity Guardian’ has not yet succeeded in removing threats and providing a corridor safe enough to resume transit. And risks are unlikely to disappear anytime soon amid intensified incidents, the ongoing war in Gaza and associated geopolitical tensions in the Middle East. This is rattling the shipping sector as well as shippers and supply chain partners down the line, and the knock-on effects could take us well into 2024.      Number of vessels entering the Red Sea has almost halved in the first week of January compared to last year Daily* number of vessels crossing Bab el Mandeb strait end of 2023-early 2024 year-on-year   Vessel crossings nearly cut in half as number of rerouted vessels mounts From mid-December onwards, shipping companies and their clients and charterers started to avoid the risky Gulf of Aden and Bab al Mandeb sea strait (30 km), which is the entrance to the Red Sea and the route to the Suez Canal. And these numbers are still increasing. In the first week of January 2024, around 220 fewer vessels took this route compared to the previous year (-41%) and the figure is on a downward track, meaning the rerouting of vessels is still mounting. As many ultra-large vessels are among those being redirected, the impact on trade volumes is even bigger (-47%).   Roughly half of the shipped tonnage crossing the canal are containerised goods making it the most important artery for container trade. The trade lane is also a vital corridor for shipping oil and oil products from the Persian Gulf to Europe and the US (some 20-25%).   Container vessels most at risk from Red Sea troubles Most of the rerouted vessels carry general cargo and particularly containers. Car carriers sailing from Asia are also being diverted, but these make up a small cargo fraction. In the three weeks after mid-December, some 80% of the container vessels on the route have been forced to change course, a level which reached 90% in the first week of January (according to Clarksons). Market leaders MSC and Maersk have diverted over 60 container vessels around the Cape in just three weeks. Other larger container liners, Hapag Lloyd, Cosco, ONE, Evergreen, HMM and ZIM have followed suit. CMA-CGM continues to use the route but is also opting for detours. All in all, this effectively means that 9 out of 10 containers on the Suez Canal route are currently sailing a longer way. As a result, global container capacity depletion could potentially go up by 20-25%.   The number of Red Sea sailings has dropped the most for general cargo vessels (including especially container ships) Daily number of vessels crossing Bal el Mandeb strait per type (rolling seven-day average)    

Sticky US inflation reduces chances of an early Fed rate cut In the wake of the Federal Reserve's dovish shift in December, financial markets had moved to price an interest rate cut as soon as March. However, the tight jobs market and today's firmer-than-expected inflation numbers suggest this is unlikely, barring an economic or financial system shock. We continue to think the Fed will prefer to wait until May.   CPI comes in above expectations December US CPI has come in at 0.3% month-on-month/3.4%year-on-year and core 0.3%/3.9% versus the 0.2/3.2% expectation for headline and 0.3/3.8% for core. So, it is a little disappointing, but not a huge miss. Meanwhile, initial jobless claims and continuing claims both came in lower than expected with continuing claims dropping to 1834k from 1868k – the lowest since late October. The combination of the two – slightly firmer inflation and good jobs numbers really brings into doubt the market expectation of a March rate cut from the Federal Reserve. We continue to see May as the most likely start point.   Core CPI measured in MoM, 3M annualised and YoY terms   This means that the annual rate of headline inflation has actually risen to 3.4% from 3.1% in November while the core rate (ex food and energy) has only fallen a tenth of a percentage point, so we appear to have plateaued after a strong disinflationary trend through the first nine months of 2023. The details show housing remains firm, with the key rent components continuing to post 0.4/0.5% MoM gains while used cars also rose 0.5% and airline fares increased 1% while medical care is also still running pretty hot at 0.6%. Motor vehicle insurance is especially strong, rising another 1.5% MoM, meaning costs are up more than 20%YoY. The so called “super-core” measure (core services CPI ex housing), which the Fed has been emphasising due to it reflecting tightness in the labour market given high wage cost inputs, posted another 0.4% MoM increase. This backdrop remains too hot for the Fed to want to cut rates imminently, especially with the economy likely posting 2-2.5% GDP growth in the fourth quarter of last year and the labour market remaining as tight as it is.   But this is just one measure and the outlook remains encouraging Nonetheless, the CPI report isn’t the only inflation measure the Fed looks at. In fact the preferred measure – the core personal consumer expenditure deflator – has shown much better performance. To get to 2% YoY we need to see the MoM% change averaging 0.17%. 0.31% MoM for core CPI is near enough double what we want to see, but for the core PCE deflator we have seen it come in below 0.17% MoM in five of the past six months. The reasons for the divergence are slight methodological differences in the calculations, with weights for key components such as housing and cars, being very different.   Observed rents still point to a sharp slowdown in housing inflation   Nonetheless, the prospects for consumer price inflation returning to 2% YoY remain good. We have to remember that cars and housing have a 50% weighting within the core CPI basket and we have pretty good visibility for both components. Observed private sector rents point to a clear slowdown in the housing components, while declines in Manheim car auction prices point to used car prices falling outright over the next two months. Also note that the NFIB small business survey showed only 25% of businesses are raising prices right now versus 50% in the fourth quarter of 2022. In fact, the last time we saw fewer businesses raising prices was January 2021. So, while today's report wasn't as good as it could have been, there are still reasons for optimism on sustained lower inflation rates in 2024. We still see a good chance headline and core CPI to be in the 2-2.5% YoY range by late second quarter.

EUR: Rejected at 1.1000 Yesterday, EUR/USD was rejected at the 1.1000 key resistance level, and in line with our dollar view, we now expect some more days of rangebound trading, with some modest downside risks for EUR/USD. One factor that we wish to keep highlighting, though, is the rather wide potential for the euro to benefit from an unwinding of ECB dovish bets in the coming months. Markets continue to price in 140bp of easing by year-end, while our economics team only forecasts 75bp. We expect to see those benefits to the euro more clearly in pairs such as EUR/CHF in the short term rather than in EUR/USD, at least until a clearer dollar downtrend emerges (in our view, a 2Q story). Other than some final December CPI reads in France and Spain (which shouldn’t move the market), the eurozone calendar is empty today. The next key data input for the euro is the German ZEW on Tuesday. We’ll keep monitoring ECB speakers to make sense of what is the “consensus” degree of rate-cut pushback the bank wants to convey to markets. Today, we’ll hear from Chief Economist Philip Lane. Elsewhere in Europe, Sweden’s Riksbank releases FX sales figures for the week around Christmas today: expect a low number, or even zero, due to low liquidity conditions. In a piece we published this week, we discuss how we expect the end of Riksbank FX sales by early February, hurting SEK in the crosse

FX Daily: Not too hot to handle Rate expectations were not moved by slightly hotter-than-expected US CPI, and support for the dollar has mostly come through the risk-sentiment channel. Range-bound trading may persist despite conditions for a stronger dollar. Inflation in the CEE region is falling; the NBR leaves rates unchanged.   USD: Markets still attached to March cut US CPI data came in a bit hotter than expected yesterday, with the core rate rising 0.3% MoM and slowing to 3.9% YoY versus 3.8% consensus. The upside surprise in headline inflation was bigger: an acceleration from 3.1% to 3.4% YoY versus the 3.2% consensus. The dollar jumped after the release, also thanks to weekly jobless claims printing lower than expected. Somewhat surprisingly, the US yield curve did not react by scaling back rate cut expectations, as a knee-jerk selloff in 2-year Treasuries was fully unwound within an hour of the CPI release. We've already discussed how we did not expect this inflation read to leave a long-lasting impact on markets, and it definitely appears that most of the fixed-income investor community is almost overlooking the release. The support to the dollar appears mostly tied to the negative response in equities, given the neutral impact on short-dated US yields. A March rate cut is still over 60% priced in, and we still see short-term vulnerability for risk assets from a hawkish repricing. The conditions for a higher dollar this month are surely there, but we have observed numerous indications that markets remain reluctant to make short-term USD bullish positions coexist with the longer-lasting view that US rates will take the dollar structurally lower by year-end. The chances of rangebound trading until we receive clearer messages by activity data and the Fed are high. Today, PPI figures for December will be released, adding information about lingering price pressures and potentially steering the market a bit more. On the Fed front, we’ll hear from hawk Neel Kashakari.

Romanian inflation edges lower Inflation in Romania closed 2023 at 6.6%, slightly higher than our estimate of 6.5%, largely in line with the consensus call of 6.65%. The breakdown by components matched our expectations, with only the non-food item prices ending slightly above our call   Compared to the previous month, December price pressures stopped dropping in month-on-month terms and recorded small increases in all categories. The largest positive contribution was again from services. Fuel items continued to get slightly cheaper due to positive developments in the world oil markets, while heating got slightly more expensive in line with seasonal heating demand. Core inflation ended up at 8.2%, decelerating from 9.1%. Overall, such small monthly changes reconfirm that price pressures have been milder than the market had expected at the end of the year. What’s more, the reading also sets the stage for price pressures to remain well-behaved in the first quarter of this year when higher taxes and excise duties kick in. These are likely to briefly push the headline back above 7.0% in January 2024 and create a hump in the inflation profile. However, by the end of the first quarter of this year, inflation should be largely back where we are today and continue the gradual descent towards our 4.7% estimate for December 2024.   Inflation outlook - core to continue to remain above headline Source: NSI, ING Looking at the outlook for 2024, once the impact of higher taxation has been largely incorporated by firms, we think that wage pressures will continue to be the main driver against the disinflationary trend. Wage data for November showed a robust annual increase of 15.1%, in line with our view that real income growth should fuel consumption ahead. The main risk to our view is whether consumers will start to act on their extra income earlier and more forcefully than expected, giving firms the full confidence to maintain their profit margins after the tax hikes. However, at this stage, we keep our 4.7% forecast for the end of the year.   As for the outlook for the National Bank of Romania, we don’t see much change at the moment. Our expectation is that the Bank will avoid being too dovish at today’s meeting, even though it will most likely welcome the positive developments on the inflation front at the end of the year, as we explain in more detail here. We hold on to our view of a first rate cut in May, although April is equally likely if firms choose a more cautious pricing strategy in early 2024.  

Next week features China's usual data deluge plus GDP, India's trade data and Australia's unemployment rate. Meanwhile, Japan reports CPI inflation and Bank Indonesia decides on policy China data deluge plus latest GDP report The monthly deluge is accompanied by GDP data for December and the fourth quarter of 2023 this month. We believe that the seasonally adjusted quarter-on-quarter growth rate was similar in the fourth quarter to the third last year, at about 1.3%. We think that this will result in a slight uptick in GDP growth to 5.2% year-on-year in the fourth quarter, and also 5.2% for the full-year figure – slightly in excess of the government’s 5.0% target. Box ticked. For the rest of the data, we expect no improvement in any of the real estate-related data, though it will be interesting to see whether any of the recent increases in lending volumes of the MLF have any impact at all on infrastructure spending. We may see some very small further improvements in manufacturing and industrial production growth. The key area to look out for remains the retail spending figures, which have been a pocket of relative resilience – although they have been punching a little bit above their longer-run trend growth in recent months and may not be able to sustain this for long. Unemployment figures from Australia While the market seems to have decided that the Reserve Bank of Australia (RBA) has finished hiking and were given an encouraging nod by the recent inflation data, the fact is that monthly inflation increases are not yet low enough for the central bank to hit its inflation target on a 12-month timeframe, and it will need to slow further. For that to look more probable, it would certainly help if indicators such as employment growth slowed. In November, employment surged, and most of the jobs that were created were full-time. Both the strength of the full-time numbers and the weakness of the part-time figures were at odds with their recent trends. We would not be surprised to see a reversal with about 30,000 part-time jobs, but a dip to only 10,000 full-time jobs for a full employment change of +40,000. Unemployment may push up by about 20,000, and though this will remain slower than trend labour force growth, we may see the unemployment rate push up to 4.0%. India's trade report Trade data for December is not likely to diverge substantially from the November figures, which delivered a trade deficit of USD 20.6bn. With the Reserve Bank of India de-facto pegging the INR, this is unlikely to have a material impact on markets. Japan inflation likely to moderate, core machinery orders to rise Japan's CPI inflation is expected to decelerate to 2.7% YoY in December from 2.9% YoY in November, with falling utility prices and other energy prices weighing on the overall number. Service sector prices, however, will likely rise on the back of high demand in travel related items such as accommodations and eating out. Meanwhile, core machinery orders should advance in November, supported by solid vehicle demand and recent recovery of semiconductor sector. Bank Indonesia to extend their pause Bank Indonesia (BI) is likely to extend its pause into 2024, with Governor Perry Warjiyo wary over a potential flare up in food inflation. Inflation has been relatively stable, but a looming El Nino episode and an expected acceleration in domestic activity ahead of the national elections in February could stoke price pressures in the near term. Concern over inflation should keep BI on hold, with the central bank also attempting to support the IDR, which is down 0.58% early in 2024. Singapore NODX to post modest rise again Singapore’s non-oil domestic exports (NODX) could post another modest expansion in December after recently snapping a string of negative growth for 13 months. A favorable base and a recent pickup in select electronics shipments likely supported NODX in December 2023. We can expect this trend to extend into early 2024. Key events in Asia next week

Hungarian inflation ends 2023 with a downside surprise Rapid disinflation continued in December, with the fuel component stealing the show. Despite favourable domestic developments, external risks are rising, so we expect the central bank to maintain the previous 75bp pace of easing.   Base effects combined with falling fuel prices stole the show Inflation in Hungary continued to fall in December, with the Hungarian Central Statistical Office (HCSO) reporting better-than-expected data. Compared with November, headline inflation fell by 2.4ppt to 5.5%, which was the result of two factors: a high base from last year, combined with a decline in general price pressures. Although the year ended on a more positive note, 2023 will be remembered for extreme inflation, with the annual average reaching 17.6%. Similar to last month, the decoupling of headline and core readings has continued on a monthly basis. While headline inflation fell by 0.3% month-on-month, core inflation in fact increased by 0.2% MoM, signalling that the strong deceleration in the headline rate is mainly due to items which are not incorporated into the core basket. At the component level, we can highlight two main drivers: food and fuel prices, which were the main contributors to the slowdown from November to December   Main drivers of the change in headline CPI (%)   The details In line with regional developments, food prices decreased by 0.1% MoM, which together with last year’s high base brought the annual food inflation rate below 5%. Compared to November, the decrease in prices of processed food was stronger than the decrease in prices of unprocessed food. Fuel prices dropped by 5% MoM, in line with falling global oil prices. This, combined with large base effects, pulled inflation down significantly. The story is that a year earlier the fuel price cap was lifted, which led to huge price increases. However, a year later, the unit price of fuel was already lower than the market price in December 2022. Deflation in durable goods inflation continued, with prices for durable goods down 1% year-on-year in December, helped by yet another negative monthly reading. This can be explained by the relative strength in the forint, which has appreciated significantly since the turmoil of last year. Plus, the easing of external inflation helps, too. Services prices rose by 0.6% MoM, which is the highest monthly reading since July. It is likely that a significant proportion of service providers have responded by raising prices to the 10-15% minimum wage increase (which was brought forward by one month to December) and other impending cost increases (e.g. excise duty hike on fuel prices, rising road tolls). Disinflation was broad-based, mainly driven by non-core elements This time in December, the main factors behind the slowdown were non-core items, like fuel and unprocessed food prices, while the decrease in processed food prices also contributed. However, with services prices up 0.6% MoM and the annual rate still above 12%, the picture for core inflation is a little less rosy. We suspect that the impending cost increases were the main reason for the higher-than-usual monthly repricing. Nevertheless, we will have more information on the dynamics of services prices in light of the January inflation report, which will be crucial in assessing whether or not there has been a second round of price increases (due to the minimum wage increase). The latest retail price expectations suggest that underlying dynamics of repricing could continue at a relatively strong pace in early 2024.   The correlation between retail price expectations and core inflation Source: Eurostat, HCSO, ING     On a positive note, core inflation decelerated to 7.6% YoY in December, while short-term dynamics are encouraging, as core inflation on a three-month on three-month basis was below 3%. At the same time, the National Bank of Hungary's measure of inflation for sticky prices also decreased, displaying a reading of less than 8.7% YoY.   Headline and underlying inflation measures (% YoY)   Inflation could fall within the central bank's tolerance band in January Based on the latest data, we conclude that inflation could slow further in early 2024, and ING's latest forecast suggests that it could fall below the upper band of the central bank's 4% inflation target tolerance band as early as January. But this will be more a result of base effects than the lack of underlying price dynamics. However, it would be premature to declare victory as positive base effects will soon run out. As a result, we expect inflation to rise again in the second half of this year. While inflation could average a tad below 4% in the first half of the year, it could be around 5% in the second half of 2024 and around 6% at the end of this year.   We expect the central bank to remain cautious as external risks rise Although favourable domestic developments via lower-than-expected inflation readings could pave the way for the central bank to cut interest rates at a faster pace, new inflation risks have emerged in the form of rising shipping costs. Several shipping companies have already suspended shipments on the Red Sea routes due to the ongoing Houthi attacks.   Container freight benchmark rate per 40 foot box (USD)   The result of trade diversion is reduced transport capacity, longer transit times by sea and a dramatic increase in shipping costs. In this regard, we have already seen shipping costs increase by up to 120% on average in the main routes in late December and early January. The Shanghai-Rotterdam route has been hit the hardest (276%), posing serious risks to supply chains and the inflation outlook, especially in Europe. This could soon be reflected in producer prices and, of course, in consumer prices as well. The impact of the Red Sea conflict on supply chains is already being felt in Europe, with Tesla announcing that it is suspending most car production at its Berlin factory. In addition, a conflict in Taiwan cannot be ruled out, which could pose an additional inflation risk. Moreover, the coordinated US and UK airstrikes against the Houthis in Yemen overnight have once again pushed up global oil prices. Adding to the tension is the fact that Iran has also seized an oil tanker in the Gulf of Oman. In our view, all these global developments have increased external risks and therefore warrant caution, which is why we expect the National Bank of Hungary to maintain the previous pace of 75bp of easing at the January meeting.

Strongest hiring plans in the Netherlands While the economic environment is deteriorating, most employers still have modest hiring intentions as we begin 2024. In fact, most employers in the Netherlands, Belgium and Germany are more optimistic about their hiring plans at the start of this year than they were at the end of 2023. In France, Switzerland and Sweden, hiring plans are weaker for the first quarter of 2024 compared to the end of 2023.    Employers in the Netherlands, Belgium and Germany are more optimistic about their hiring plans in 2024 Percentage of employers planning to hire minus the percentage of employers expecting a reduction in staffing levels     Less demand for temporary workers 2024 will be another challenging year for the temporary employment sector. Economic growth forecasts for most European economies remain weak for 2024, ranging from a mild contraction in Sweden and Germany to a lingering 0.7% GDP growth in Belgium and the Netherlands. As a result, unemployment could rise slightly.  The sluggish economic outlook also has consequences for the employment services industry. Companies are reluctant to invest now that the market remains highly uncertain. This softens the demand for temporary agency workers. That's particularly true for the manufacturing sector, an important industry for temp workers, where new orders continue to decline, as does capacity utilisation. But employment prospects for temp workers are also deteriorating in the services sector. Taken together, market volumes in the employment services sector are expected to decline in most European economies next year.   Staffing sector forecast: volumes are likely to decline in most European economies Volume output (value added) employment services industry, year-on-year, indices (2019=100)     Belgium - Shorter duration of temporary work GDP growth in Belgium is expected to be relatively high at 0.7% in 2024, compared to other European economies. This is mainly due to automatic wage indexation, which means that income increases with the inflation rate (excluding alcohol, tobacco and fuels). Higher purchasing power stimulates consumer spending and, thus, economic growth. Nevertheless, higher hourly labour costs will negatively impact labour demand, including the demand for temporary agency workers. We, therefore, expect a decline in market volumes in the temporary employment sector in 2024. Despite a slow economic growth, Belgium's labour market remains very solid. This is largely due to the country's tight labour market. One of the consequences of talent scarcity is that the duration of temporary work is becoming shorter because temp workers are more often hired on a permanent basis.    France - Hiring plans on hold Economic growth is expected to slow further, from 0.9% in 2023 to 0.6% in 2024. The outlook for both the French services and manufacturing sectors remains bleak. Both sectors are facing lower demand, high inflation and greater uncertainty. In addition, the French labour market is showing the first signs of cooling down, resulting in a rise in unemployment in 2024. The deterioration of the employment climate is mainly due to the services sector. Because almost half of the temps actually work in the service sector, this will also have a negative impact on the demand for temporary agency workers and the number of hours worked. We, therefore, expect a further contraction in employment activities in 2024.    Germany - Hiring freeze over recession fears Weaker global demand, high interest rates, energy uncertainty and persistently high inflation are hitting the German economy this year. This will have consequences for the demand for temporary agency workers. Adverse macroeconomic developments are putting pressure on the German automotive industry, an important sector for employment agencies. In addition, production is also declining substantially in other subsectors of the manufacturing industry. Another factor negatively affecting the temporary employment sector is the shortage of temp workers due to demographic developments. Overall, we expect a further decline in the volume of employment activities in 2024.    The Netherlands - Self-employment is an attractive alternative As a result of a weakening economy, the number of temporary employment hours in the Netherlands is expected to decrease further in 2024. We anticipate a decrease in the number of temporary agency hours by approximately 5% by 2024, mainly due to continued relatively low economic growth. In manufacturing, temp workers are the first to be laid off due to a rapid decline in production and the number of orders.  A major challenge for the staffing industry in the Netherlands is the impact of stricter regulations, which make agency workers more expensive and less flexible. As a result, other forms of employment contracts become more attractive for hiring companies, such as self-employed professionals.    More self-employed people, less flexible employment in the Netherlands in 2023 Share of labour position in the labour force in the Netherlands, third quarter    Sweden - The job market is cooling down Sweden is among the European economies expected to enter a recession in 2023, mainly due to high inflation and higher interest rates. We expect economic activity to stagnate this year. There are already signs that the job market is cooling down. As a result, consumer and business confidence remains low. The economic situation is likely to weaken demand for temp workers, especially in the construction and manufacturing sectors. Overall, we expect market volumes for the temporary employment sector to decline again in 2024.    Switzerland - Another year of negative volume growth in employment activities Like many other European countries, the Swiss economy became more challenging in 2023 due to high inflation, higher interest rates and weakening global demand. GDP growth is expected to slow from 2.2% in 2022 to around 0.6% in 2023 and 2024. The Swiss manufacturing industry, with a relatively large weight of the cyclical chemical and pharmaceutical sectors, is shrinking. The staffing market is also negatively affected by staff shortages, making it difficult to find suitable candidates. In short, we expect another year of negative volume growth in employment activities in Switzerland in 2024.    Manufacturing and construction are the most important sectors for the Swiss staffing industry Percentage of industries that used temporary agency work in Switzerland in 2022   The United Kingdom - Weak outlook for the employment activities sector Economic activity in the UK is expected to grow only modestly in 2024, similar to most other European economies. The sluggish economy will lead to a decrease in the number of vacancies and an increase in the unemployment rate. However, given the ongoing staff shortages, this increase is expected to be limited. Nevertheless, we expect the demand for temporary agency workers to weaken further in 2024. 

Grim outlook for the European staffing sector in 2024 After two years of above-average volume growth for the European temporary employment sector, that growth turned to contraction last year. For 2024, we expect the freeze on hiring temp workers to continue. Sluggish economic growth and staff shortages are the main challenges for the sector this year.   Slowdown in economic growth in most European economies Economic and geopolitical uncertainties, combined with higher interest rates, are likely to soften economic growth in Europe this year. Both companies and consumers are taking it easier with investments and spending due to those higher rates and persistently high inflation. As a result, GDP growth in most European economies will contract slightly or grow only modestly in 2024. Modest economic growth in most European economies in 2024 GDP growth, year-on-year   The European labour market remains tight Despite an economic slowdown and a cooling of the labour market, unemployment will remain relatively high in most European economies in 2024. While vacancy rates will be slightly lower in 2024, many European economies continue to struggle with a tight labour market. This is not only due to an ageing population, but also because the average number of hours worked per person is still lower than before the pandemic.  Staff shortages could slow market volume growth in the temporary employment sector, as temp agencies experience more difficulties recruiting new employees. Based on the job vacancy rate, the labour market is tightest in Belgium and the Netherlands, with 5% of unfilled vacancies in the third quarter of 2023.    The labour market is tightest in Belgium and the Netherlands Job vacancy rate, third quarter 2023, seasonally adjusted

Key events in developed markets and EMEA this week This week, the main focus in the US will be the jobs report which is expected to indicate that hiring is slowing more meaningfully as economic uncertainty increases. In Turkey, all eyes will be on the release of December annual inflation which we expect to come in at 65.1%.   US: Jobs report expected to indicate that hiring is slowing more meaningfully After the dovish shift from the Federal Reserve at the December FOMC meeting, markets continue to price six 25bp rate cuts for 2024, in line with our long-held view. There are several key data releases that will give the markets food for thought as to what the risks are to this assessment. The ISM reports will give us an update on how businesses are seeing the situation and we expect them to indicate an ongoing soft trend in growth rather than clear evidence of a downturn. The jobs report will be the focus though and that is expected to indicate that hiring is slowing more meaningfully now as economic uncertainty increases. The unemployment rate is likely to tick slightly higher to 3.8% from 3.7%. Markets are on the verge of pricing the first rate cut for March, but we think the Fed is more likely to wait until May. Turkey: Annual inflation expected to increase to 65.1% In December, we expect annual inflation to increase to 65.1% (with a  3.2% month-on-month reading) from 62.0% a month ago, in line with the forecast presented in the latest inflation report of the Central Bank, while core inflation will remain elevated at around 72%. Inertia in services inflation, along with administered price and wage adjustments will likely remain as the major drivers of the inflation outlook in the near term. Key events in developed markets this week Source: Refinitiv, ING Key events in EMEA this week Source: Refinitiv, ING

CEE: The market is losing patience with PLN Yesterday's PMIs in the CEE region confirmed continued weakness in industry in December, especially in the Czech Republic where the leading indicator fell to its lowest reading since September last year, sinking hopes of a recovery at the end of the year. The calendar is empty in the region today, but it should get more interesting in the days ahead. On Thursday, the Czech Republic will release the state budget result for last year. The Ministry of Finance is already indicating that the resulting deficit could be lower than projected (CZK295bn), which would be good news for Czech government bonds (CZGBs). At the same time, MinFin is expected to publish a funding plan for this year by the end of this week, the last one in the CEE region, which we believe should also point to a positive picture for CZGBs this year. Then, on Friday, the final 3Q GDP report in the Czech Republic will be published, while in Poland, December inflation will be released. We expect a small increase from 6.6% to 6.7% year-on-year, slightly above market expectations. However, the wide range of estimates suggests an interesting print here. In the FX market, most of the region started the year with gains except the Polish zloty. The general picture for the CEE region seems mixed with a stronger US dollar on the one hand and higher market rates across the board on the other. Although PLN should benefit the most from higher rates across the region in our view, it is the weakest since November last year. Heavy long positioning and just a lazy move down in EUR/PLN in recent weeks seems to have triggered some selling in PLN. Yesterday's paying flow in the rates market seems to have stopped the sell-off around 4.360 EUR/PLN, however, it is hard to say if we are at the end for now. We still expect a stronger PLN given the macro and monetary policy outlook, however for now we will have to experience a moment of weakness. Elsewhere in the region, higher market rates seem to have supported FX and CZK and HUF are enjoying new gains. In Hungary in particular, we could see more in this direction over the coming days, in our view.

CHF: SNB FX policy to hit the franc One of the strongest G10 FX performers over the festive period has been the Swiss franc. This has been a surprise to us and many in the market. At the last Swiss National Bank policy meeting (14 December), the SNB told us that it was no longer focusing on FX sales as part of its monetary policy toolkit. That may have been a recent change of mind for the central bank, however, given that in 3Q23, it had still sold CHF37bn of FX (data released 29 December).  With the SNB now predicting inflation to be within range over the forecast horizon and having adopted a balanced risk assessment on inflation too, we doubt the SNB will be too happy with the 3% appreciation in the trade-weighted Swiss franc since its December meeting. We suspect the Bank is more likely to be an FX buyer than seller now and could easily see the SNB helping to nudge EUR/CHF back to the 0.95 area this month.

EUR: A well-justified correction EUR/USD performed quite strongly during the holiday period, touching 1.11 on 27 December. The post-correction levels around 1.0950 are, however, more in line with the short-term rate differential. We must remember that the rise in Fed dovish bets was matched by European Central Bank rate cut speculation, and the diverging narratives expressed at the respective December monetary policy meetings did not really change the short-term rate picture. The EUR-USD 2-year swap rate gap remains around 125bp, close to the lows for 2023. EUR/USD detached from its short-term rate dynamics in November/December, as dovish Fed bets fuelled a big rally in equities and the risk-on environment had an asymmetrical impact on the pro-cyclical EUR. However, dwindling risk sentiment definitely puts EUR/USD at risk of reconnecting with its depressed short-term rate differential, especially considering domestic economic news in the eurozone has remained rather grim. We think EUR/USD continues to face downside risks, and a return above 1.10 appears less likely than a decline to the 1.08 region. This week, the focus will be on inflation numbers for December: France and Germany’s numbers are released tomorrow, with the eurozone figures on Friday. EUR/GBP climbed back close to the 0.8700 mark in late December, and while we still expect a capitulation of the Bank of England's higher-for-longer narrative to hit the pound this year, the short-term outlook remains rosier for GBP than for the euro. A return to 0.8600 is possible before a clearer appreciating trend emerges.

FX Daily: A dollar rally to start the New Year The dollar jumped yesterday as investors started to return from the long Christmas break. Markets are unwinding some dovish bets, and questioning stretched equity valuations, ultimately favouring defensive bets in FX. The dollar also tends to seasonally outperform at the start of the year. Today, the focus moves back to data, as well as the FOMC minutes.   USD: Dollar seasonally strong in January and February Defensive bets dominated in global markets as investors returned from the long Christmas break. This was particularly evident in the FX market, as the dollar corrected sharply higher yesterday to the detriment of European currencies. The tendency of dollar selling and European FX buying that emerged in December was triggered by the dovish pivot at the December FOMC, but seasonal factors also played a role. The dollar tends to underperform at the end of the year, likely due to some tax-related flows from US corporations: DXY weakened in December in each of the past seven years. While the seasonality factor isn’t as strong, January tends to be a good month for the dollar, with DXY having risen on average 0.4% in the past 20 years. February has shown a stronger positive seasonality pattern, with DXY having appreciated in each of the past seven years. The dollar strength in the early part of the year is often associated with the December tax flows by US corporates being reverted, and while expectations of a firmer dollar at the start of the year (which we agree with) could have exacerbated yesterday’s USD buying, the key factor remains Federal Reserve dovish bets against the backdrop of stretched equity valuations after a strong year for US stocks, in particular in the tech sector. We have observed some tentative unwinding of dovish bets as trading resumed: interestingly, the Fed Funds futures curve no longer fully prices in a March cut (21bp at the moment). As trading volumes pick back up this week, US calendar events will also offer direction to investors. Today, the Fed releases the minutes of the December FOMC, which should shed some light on the reasoning behind the dovish revision of the Dot Plot. Given the strong dovish reception by the market after the December Fed announcement, there is a risk of the minutes preventing further dovish bets as some conditionality (in terms of economic data developments) for easing policy emerges in the minutes. Today also sees the release of JOLTS job openings for November and the December ISM manufacturing, and consensus is positioned for a good print in both releases. We are inclined to think that the dollar can hold on to most of yesterday’s gains in the next couple of days, as data may prove benign and investors favour defensive positions ahead of Friday’s US payrolls – which are expected to print a respectable 170k. DXY may hover around the 102 gauge into the payrolls. Beyond the very short term, we still expect a further dollar decline to materialise this year as the deterioration in the economic outlook forces large Fed cuts, but the pace of USD depreciation should be more moderate in 1H24 compared to November/December 2023.  

Agriculture – Indian sugar output falls Recent data from the National Federation of Cooperative Sugar Factories Ltd. shows that sugar production in India fell by 7.6% year-on-year to 11.2mt between 1 October - 31 December, lower than the 12.1mt produced over the same period last year. Around 511 sugar mills were crushing cane as of 31 December, down from 514 mills last year. The latest data from Ukraine’s Agriculture Ministry shows that grain exports so far in the 2023/24 season stood at 18.4mt as of 2 January, a decline of 20% year-on-year. Total corn shipments stood at 9.6mt, down 24% YoY, while wheat exports fell 10% YoY to 7.6mt. The fall in exports is in line with the series of obstacles Ukrainian shipments have faced recently.

Metals – Gold starts 2024 on a strong footing Gold held up relatively well in the first trading day of the year, despite a stronger USD and move higher in US treasury yields. Later this week, the market will be watching US data releases, including jobs data that may influence the Fed’s monetary policy path and could add to gold’s upward momentum. We believe that the Fed policy will remain key to the outlook for gold prices in the months ahead. The precious metal is likely to keep on building on last year’s gains (+13% and a first annual gain in three years) and we expect prices to reach record highs this year on the assumption that the Fed starts cutting rates in the second quarter of the year, the dollar weakens, safe-haven demand continues amid global economic uncertainty and central bank buying remains at high levels.

The Commodities Feed: Energy starts 2024 on a softer note Energy markets started the new year weaker with both oil and gas prices coming under pressure yesterday. This is despite growing tensions in the Middle East.   Energy – Oil starts the year weaker The oil market started the first trading day of 2024 on a softer note with ICE Brent settling almost 1.5% lower yesterday. Energy markets were unable to escape the broader pressure seen on risk assets with equity markets also weaker. The weakness in oil comes despite a ratcheting up in tensions in the Middle East. Iran has sent a warship to the Red Sea after the US sunk several Houthi boats in the region, following a number of attacks on commercial ships by the Houthis. While the geopolitical situation is a concern for the oil market, a fairly comfortable oil balance over the first half of 2024 does help to ease some of these worries. OPEC+ will hold a Joint Ministerial Monitoring Committee meeting in early February, according to Bloomberg. The group will be keen to discuss the state of the oil market, particularly given the price action seen following the announcement of deeper cuts last month from a handful of members. However, given the scale of cuts we are already seeing, it will be increasingly difficult for the group to cut more if needed over the course of 2024. Already, the last few rounds of cuts have been driven by voluntary reductions from individual members rather than group wide cuts – a sign that it is becoming more difficult to get all members on board to cut. European gas prices have come under significant pressure, with TTF settling 5.5% lower yesterday and at its lowest levels since August. This weakness comes despite forecasts for colder weather later in the week. However, storage remains very comfortable with it a little more than 86% full, which is above the 83.5% seen at the same stage last year. In the absence of any supply shocks or demand surge, it is looking likely that European storage will finish the 2023/24 heating season around 50% full, which suggests limited upside for prices.

Rates Spark: Enough to hold rates down The US 10yr yield remains below 4%. However that's not been validated by the data as of yet. Friday's payrolls report can be pivotal here, but based off consensus expectations the market will remain without validation from the labour market. Also, the Fed's FOMC minutes due on Wednesday are unlikely to be as racy as Chair Powell was at the press conference.   Sub 4% on the US 10yr to hold at least till we see Friday's payrolls outcome The 13 December FOMC meeting outcome remains a dominating impulse for the rates market. The US 10yr yield shot to below 4% on that day, and has broadly remained below 4% since. It was briefly below 3.8% over the holiday period, but now at closer to 4% it is looking for next big levels. The thing is, validation of the move of the 10yr Treasury yield from 5% down to 4% came from the Fed, but not so much from the macro data. We can reverse engineer this and suspect that the Fed has either seen something, or fears that it will see something that will require lower official rates. In consequence, data watching ahead remains key. In that respect, we are days away from a key reading on the labour market as December’s payrolls report is due on Friday. A consensus outcome showing a 170k increase in jobs, unemployment at 3.8% and wage growth at 3.9% would leave us still lacking validation for lower market rates from the labour market data. We have it from survey evidence, and from scare stories on credit card debt and commercial real estate woes. But it's the labour market that is really pivotal. Risk assets struggled a tad yesterday, and that makes a degree of sense given the complicated back story, and the remarkable rally seen into year end. While a one-day move cannot be simply extrapolated, there are reasons to be a tad concerned on the risk front at this early phase of 2024. Geo-political concerns have not abated, and in fact if anything are elevating. Europe is closest to many of these risks, and the economy has been faltering for at least a half year now. Yes the market is expecting rescue rate cuts, but the European Central Bank is yet to endorse those expectations. An elevation of stress without the prospect of near term delivery of rate cuts can be an issue for risk assets. For market rates, this combination maintains downward pressure. The only issue is how far we’ve come so fast. We remain of the view that the US 10yr fair value level is around 4%, but that we will likely overshoot to the downside to 3.5% in the coming months. Our fair value comes of a forward 3% floor for the funds rate plus a 100bp curve. See more on that here.   Today's events and market views It's quiet in Europe for data through Wednesday. The bigger focus for Europe will be on regional inflation readings for December due on Thursday, along with a series of December PMI readings. The likelihood is for some stalling on inflation reduction alongside confirmation of ongoing manufacturing and business weakness. In the US on Wednesday we get ISM readings that will also show a degree of pessimism in US manufacturing. The job openings data will also be gleaned, but the bigger market impulse can come from the FOMC minutes, ones that will refer back to the pivotal 13 December meeting. The odds are they won’t be nearly as dovish as Chair Powell was at the press conference.

Japan Data Brief : What you may have missed over the year-end holiday After an unexpected contraction in 3Q23, the economy appears to have recovered modestly. Inflation slowed due to base effects while the monthly activity outcomes were a bit mixed. We don't expect an imminent Bank of Japan rate hike but it may still terminate the yield curve control programme in the first quarter as JGB market conditions remain supportive. Summary The monthly activity data was mixed. Industrial production was softer than expected, but the rebound in retail sales was stronger than expected. As Japan's main growth engines are consumption and services, we expect fourth quarter 2023 GDP to rebound despite soft manufacturing activity. Inflation has also came down sharply, which should support the BoJ's dovish stance for now. We believe that the BoJ is preparing for its first rate hike in the second quarter, when the government's stimulus will be supporting growth while another big jump in wage growth is achievable throughout the spring wage negotiation season. Meanwhile, the yield curve steepened from November when the BoJ decided to discontinue its daily fixed-rate purchase operations but the 10Y Japanese government bond (JGB) yields were below the 0.6% level at the end of last year. We think the Bank of Japan is likely to terminate its yield curve control programme in January as market pressures should be off thanks to the global bond market rally and JGB yields have been below the BoJ's hinted proper 10Y level of 0.8%. Also, a new quarterly outlook report could justify the BoJ's policy changes by raising its inflation outlook for FY 2024 and 2025.  Industrial production declined but only marginally so Industrial production fell -0.9% month-on-month seasonally adjusted in November (vs 1.3% in October, -1.6% market consensus), mainly led by poor vehicles outcomes (-1.7%). There were temporary shutdowns of factories due to shortages of some auto parts. Thus, we expect a rebound in December as production lines returned to normal. We found a rebound in chip-producing equipment (7.2%) is likely to continue. Japan is not a major semiconductor production hub, but is one of the major players in the chip-making equipment industry. Together with upbeat outcomes from South Korea's chip production and exports, we believe the global semiconductor cycle is on a recovery path.  Retail sales rebounded more than expected in November Retail sales rose 1.0% MoM sa in November (vs -1.7% in October, 0.5% market consensus). The rebound was stronger than expected, but it couldn't fully offset the previous month's decline. But in a positive note, retail sales rebounded in most of the major categories, except food and beverages (-0.8%), signalling the consumption recovery was widespread

Notes from a slow year-end morning By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank  The last PCE print for the US was perfect. Core PCE, the Federal Reserve's (Fed) favourite gauge of inflation, printed 0.1% advance on a monthly basis – it was softer than expected, core PCE fell to 3.2% on a yearly basis – it was also softer than expected, and core PCE fell to 1.9% on a 6-month basis, and that's below the Fed's 2% inflation target.   Normally, you wouldn't necessarily cheer a slowdown in 6-month inflation but because investors are increasingly impatient to see the Fed cut its interest rates, all metrics are good to justify the end of the Fed's policy tightening campaign. So here we are, cheering the fact that the 6-month core PCE fell below the Fed's 2% target in November. The US 2-year yield is preparing to test the 4.30% to the downside, the 10-year yield makes itself comfy below the 4% mark – and even the 3.90% this morning, and the stocks joyfully extend their rally. The S&P500 closed last week a few points below a ytd high, Nasdaq100 and Dow Jones consolidated near ATH levels and the US dollar looks miserable. The dollar index is at the lowest level since summer and about to step into the February to August bearish trend.   There is not much data left to go before this year ends. We have a light economic calendar for the week, and the trading volumes will be thin due to the end-end holiday.   Morning notes from a slow morning  Major central banks reined in on inflation in 2023 – the inflation numbers are surprisingly, and significantly lower than the expectations. Remember, we though – at the start of the year - that the end of China's zero-Covid measures was the biggest risk to inflation. Well, we simply have been served the exact opposite: China's inability to rebound, and inability to generate inflation simply helped getting the rest of us out of inflation. China did not contribute to inflation but to disinflation instead.  The Fed sounds significantly more dovish than its European peers – even though inflation in Europe and Britain have come significantly down, and their sputtering economies would justify softer monetary policies, whereas the US economy remains uncomfortably strong. Released last Friday, the US durables goods orders jumped 5.4% in November! The diverging speed between the US and the European economies makes the policy divergence between the dovish Fed and the hawkish European central banks look suspicious. Yes, the EURUSD will certainly end this year above that 1.10 mark, nonetheless, the upside potential will likely remain limited.   Elsewhere, everyone I talk to is short USDJPY, or short EURJPY, or GBPJPY. But the bullish sentiment in the yen makes the yen stronger and a stronger yen will help inflation ease in Japan, and slow inflation will allow the Bank of Japan (BoJ) to remain relaxed about normalizing policy. And indeed, released this morning, the BoJ core inflation fell more than expected to 2.7%. Bingo! Therefore, it looks like the USDJPY's downside potential may be coming to a point of exhaustion near the 140 – in the absence of fresh news.   In energy, oil is having such a hard time this year. The barrel of American crude couldn't break the $74pb resistance and there is now a death cross formation on a daily chart. Yet the oil bulls have all the reasons on earth to push this rally further: the tensions in Suez Canal are mounting, the war in the Middle East gets uglier, Iran looks increasingly involved in the conflict, OPEC restricts production, and central banks are preparing to cut rates. But interestingly, none has been enough to strengthen the back of the bulls. Failure to clear the $74/75 resistance will eventually weaken the trend and send the price of a barrel below $70pb. If that's the case, there will be even more reason to be confident about a series of rate cuts next year.  

Poland's deficit will be high in 2024 but new government trims elections pledges Poland's government has pencilled into the budget new pledges worth just 0.5% of GDP, below our 0.7% estimate. Both external and domestic conditions should allow the large fiscal gap and borrowing needs to be adequately funded.   New budget based on legacy draft One of the most urgent tasks of the new Donald Tusk government, which took power after Mateusz Morawiecki failed to secure a vote of confidence in early December, was to prepare and legislatively process the 2024 budget. Given the limited time frame, the new draft heavily relies on Morawiecki's proposal from September. The original plan pointed to a general government deficit in 2024 of 4.5% of GDP. Having analysed the September document and election pledges of the new ruling coalitions that are deliverable in the short term, we estimate that next year’s fiscal gap could be up to 1.5% of GDP higher i.e. around 6% of GDP. We estimate additional revenues of 0.7% of GDP. But also, we have seen a revenue shortfall of 0.7% of GDP, as the forecasts were overly optimistic (particularly with respect to VAT collections) and may, in fact, turn out to be 0.7% of GDP below official forecasts. The proposal put forward by the Tusk administration delivers substantially less than pledged during the election campaign, but close to our estimates assuming additional costs amounting to 0.7% of GDP. The new spending in 2024 is mostly linked to the 30% wage hike for teachers and 20% higher wages for public administration. As a result, the proposed 2024 state budget deficit (cash basis) is nearly PLN20bn (0.5% of GDP) higher than initially proposed. Revenue forecasts remained broadly unchanged, so the 2024 general government deficit may still amount to nearly 6% of GDP. Also important to note is that the highest spending bid, i.e. higher tax-free allowance (1.3% of GDP) was just postponed or not mentioned in both the speech delivered to parliament before the vote of confidence and the 2024 budget draft.   Increase in planned 2024 net borrowing needs even higher than in case of headline deficit The September draft budget bill estimated the 2024 net borrowing needs at a record-high PLN225bn (6% of GDP). The amended draft by new finance minister Andrzej Domański boosted new borrowing by nearly PLN27bn (0.7% of GDP) to PLN252bn (6.7% of GDP) but took some steps to reduce the supply of PLN and hard currency treasury securities. A move facilitated by access to new loans from the RePower EU programme, including pre-payments that may take place this year. The finance ministry will be challenged to place such sizeable debt supply into the market, but we believe both the external and internal environment are favourable to successfully covering the borrowing needs. We see a few options that MinFin could use to diversify funding and surprise investors, who have been quite cautious about bidding for Polish government bonds given the expectation that higher supply could lift yields. Firstly, domestic funding of borrowing needs may be higher than we have assumed so far - in the third quarter of 2023, deposits in the banking sector were higher than loans by PLN 67 billion. The net savings growth in the banking sector in the second half of 2023 is very high so local banks can buy a lot of government bonds next year. Secondly, the Ministry of Finance could use its current cash buffer and/or advances from EU funds, which are coming in faster than expected, to cover 2024 borrowing needs. Thirdly, the MinFin may increase bond issuance in FX, as the market absorption there is high. Also since the 15 October general election, the new coalition has received substantial credit of trust from foreign investors. Since mid-October the PLN has gained nearly 20 figures vs. the euro. The bottom line is that 2024 will be a year of loose fiscal policy and record-high borrowing needs, but investors are eager to accept it, assuming the credible consolidation path that will be put forward in coming years.  

Red Sea avoidance signals a disruptive start to 2024 for trade and supply chains We didn't expect a quiet year for trade and supply chains, but before it's even started, the vital shipping sector has been once again been pushed into the centre of geopolitical conflicts. Companies have started avoiding the Red Sea and this already leads to significant delays in supply chains and prices hikes on the spot market – and it could still get worse.   What's going on? Following several drone attacks from Houthi militants on merchant vessels, most of the world's largest container liners – including MSC, Maersk, CMA-CGM, Hapag Lloyd, Evergreen and HMM – began avoiding the 30km wide Bab al Mandeb sea strait to the Red Sea and the Suez Canal, which handles some 12% of global trade. They detoured their ultra large container vessels around Cape of Good Hope from mid-December. Roughly half of the shipped freight through the canal comprises containerised goods, making it the most important artery for container trade. The trade lane is also a vital corridor to ship oil and oil products from the Persian Gulf to Europe and the US. Re-routing around the Cape adds some 3,000-3,500 nautical miles (around 6,000 km) to the journeys connecting Europe with Asia. At a speed of 14 knots, this means around 10 days is added to the duration of the trip. Since almost all container vessels are detoured, this could push up vessel capacity consumption by over 20-25%, which would turn overcapacity into a short-term shortage.  An international coalition has been created by the US to provide naval escorts, but the risks won’t disappear immediately, and the rerouting continues.   Global container spot rates are on the rise again on the verge of 2024 World container index (WCI), freight rates in $ per FEU (40 ft container)   Container rates on the rise and delays upcoming, but impact is all about long it lasts The massive re-routing of vessels will lead to significant delays on arrival in ports. And this will also have knock-on effects on connecting vessels and the turnaround of vessels. In European ports like Rotterdam (most calls for ultra large container vessels from Asia), but also Antwerp and Hamburg, this could lead to new congestion and delays in delivery further down the line in the first quarter. The weeks ahead of the Chinese New Year are busy in container shipping, but at least for shippers and consumption in Europe, the first quarter is quieter, and inventories are still relatively high. Nevertheless, the mounting delays could turn into shortages or waiting times for some consumer products in the first part of the year. After spiking at unprecedented levels at the end of 2021, container rates returned to their pre-pandemic levels and even below over the course of 2023, as the high demand from the pandemic retreated and a range of newly delivered vessels created overcapacity. But the Red Sea crisis pushed up container global container rates again. For the US, the combination with the Panama Canal's low water restrictions even complicates supply lines to the East Coast. However, an important difference between the pandemic era and the Suez Canal blockage of the Evergiven in 2021 is that the demand-supply balance is currently far less strained. This will most likely prevent rates from reaching multiples again, but it all depends on how long the situation lasts.   Unexpectedly higher freight rates and also more complicated pricing for shippers in 2024 For shippers, freight charges are increasingly opaque as several surcharges add to bold port to port rates. The current situation in the Red Sea region leads to emergency contingency adjustment charges. This also further complicates next to other price supplements, such as peak season surcharge and ‘emissions surcharge’ following the start of the European emissions trading system (ETS). Either way, for shippers and eventually also for consumers, 2024 starts with higher than expected freight rates.  

JPY: Ueda disappoints markets, but April hike on the table The Bank of Japan kept rates unchanged today as widely expected, but disappointed market hawkish expectations. The Bank kept its dovish guidance unchanged (“take additional monetary easing steps without hesitation if needed") which forced markets to abandon speculation of a rate hike in January.   The yen took a hit, falling almost by 1.0% against the dollar after the announcement and press conference by Governor Ueda, but we identified a few changes in the Bank’s assessment of the economic outlook that likely endorse the market’s lingering expectations for a hike in April. In particular, the BoJ noted that private consumption has continued to increase modestly, that inflation is likely to be above 2% throughout the 2024 fiscal year and that underlying inflation is likely to increase. Those statements are aimed at paving the way for policy normalisation in 2024, in our view. We expect the yield curve control to be scrapped in January and a hike to be delivered in April. From an FX perspective, the yen may simply revert to trading primarily on external factors (US rates in particular) after the BoJ ignored market pressure and likely signalled the path to normalisation should be a gradual one. We remain bearish on USD/JPY in 2024, as the oversold yen can still benefit from the end of negative rates in Japan and we see the Fed cutting rates by 150bp, but the pace of depreciation in the pair will be gradual in the near term, and we only see a decisive break below 140 in 2Q24.   ⚠️ Did the #BOJ fall asleep on the $JPY 🖨️ print button or what? 🤭Almost makes you wonder if someone out there is in desperate need of liquidity… 🤔 https://t.co/EdRfXb9vUH pic.twitter.com/z2dN3YVtuH — JustDario 🏊‍♂️ (@DarioCpx) December 19, 2023

CAD: Macklem turns dovish The Canadian dollar is lagging other pro-cyclical currencies at the start of this week after Bank of Canada Governor Tiff Macklem said in a TV interview yesterday that he expects rates to be cut next year. This is a surprise statement by Macklem, who only two weeks ago reiterated the hawkish bias in the BoC policy statement. Offering a timeline for rate cuts appears inconsistent with the BoC's claim that it “remains prepared to raise the policy rate further if needed” and likely validates the market’s pricing for 100bp of easing next year – despite Macklem’s caveats on the disinflation progress. Despite our view of a dollar decline and outperformance of pro-cyclical currencies next year, we expect the Canadian dollar to underperform other commodity currencies as the BoC cuts rates aggressively (we estimate 150bp in 2024) on a grim economic outlook and as the loonie suffers from its correlation with US economic data.

EUR: ECB versus data Unlike officials at the Federal Reserve, European Central Bank members have managed to deliver a more coordinated pushback on rate cuts, both at last week’s policy meeting and in post-meeting communication. Governing Council member Peter Kazimir said the risks of premature cuts are bigger than those of keeping monetary tight for too long, and fellow hawk Pierre Wunsch highlighted how rate cuts cannot be discussed until wages move to a level that is compatible with the inflation target. Despite that, it still appears quite hard to dissuade the market from its conviction that rates will start to be cut in April. Data remains the missing link for a more material repricing in ECB rate expectations, and another miss by the Ifo yesterday in Germany suggests we are not at peak pessimism yet on the eurozone economic outlook. EUR/USD can trade above 1.10 during the holiday period as the dollar enters a seasonally soft period, but rate differentials are still too depressed to argue for a sustainable rally above 1.10 just yet.

FX Daily: Cautious BoJ hits the yen The Bank of Japan did not give in to market pressure and kept its dovish guidance intact. However, the wording on the economic and inflation outlook paves the way for a hike in the second quarter in our view. The yen should revert to being driven mostly by US rates after taking a hit today. Elsewhere, Fedspeak will remain in focus along with some US data.   USD: Mixed Fedspeak The dollar has started the week modestly offered, with Scandinavian currencies performing well and the yen dropping after this morning’s Bank of Japan announcement (more in the JPY section below). The US calendar was empty yesterday, so the spotlight was on Fedspeak. Loretta Mester said that the markets are “a little bit ahead” on rate cuts, and Mary Daly said that her outlook for rate cuts is very close to the median Dot Plot (75bp of easing next year). Interestingly, Daly said that policy would still be restrictive if three cuts were delivered next year, which would probably imply greater room for easing if the economic outlook deteriorates. Chicago Fed President Austan Goolsbee said he is confused by the market reaction to the Dot Plot, but remarks from Daly and Mester instead seemed to endorse investors’ bullish response. We’ll keep monitoring Fed speakers today, with Thomas Barkin and Raphael Bostic (the latter swings more to the dovish side) set to deliver remarks. However, the focus will also be on US data, with housing starts set to have declined along with building permits in November. October TIC data is also due today. Tomorrow’s consumer confidence and Friday’s PCE and personal income numbers will be the last bits of data that can move the market before Christmas. Today, FX markets may stay quiet, and the general mood on the dollar could be modestly bearish unless we hear some more convincing pushback on rate cuts by Fed offici

Gold attempts to rebound following Friday's sharp drop The price of gold shows a renewed upward momentum at the start of the week as it attempts to rebound from the drop seen on friday which brought the price down nearly 1.50% after the Federal Reserve's recent signaling of the conclusion of its monetary policy tightening cycle and the suggestion of a cumulative 75 basis points rate reduction in 2024 led to a sharp upward move last Wednesday. Additionally, heightened geopolitical risks and concerns surrounding a more pronounced economic downturn, particularly in China and the Eurozone along with general economic uncertainty, provide added support to gold as a safe-haven asset. From a technical point of view, any subsequent upward movement is likely to encounter resistance in the vicinity of the $2,040 range and a breach beyond this level could prompt a test of last week's peak, around the $2,049-2,050 region. On the other hand, a downside correction may find support in the $2,015-2,010 area before approaching the psychological threshold of $2,000 and which may be followed by the $1,980 area from which last wednesday's post-FOMC upward move started.  

German Ifo index drops in December on fiscal woes The latest Ifo index reading suggests that recent fiscal woes are weighing on German business sentiment. It also shows that the recession risk remains high, not only for 2023 but for 2024, too. The fiscal woes of the last month have clearly left their mark on the German economy, with the country's most prominent leading indicator today showing just how difficult it will be for the economy to bounce back. The Ifo index ended the year on a negative note and came in at 86.4 in December, from 87.2. After three consecutive increases since the summer, this was the first monthly drop. The Ifo index ends the year at a significantly lower level than in December 2022. Both the expectations and the current assessment components dropped in December.   Another year of crisis and stagnation comes to an end Today’s Ifo index reading brings the macro year for Germany almost to a close. It has been another turbulent year in which the economy seems to have been in permanent crisis mode. Supply chain frictions resulting from the pandemic lockdowns and war in Ukraine, an energy crisis, surging inflation, tightening of monetary policy and several structural shortcomings - the list of crises and challenges facing the German economy is long. This is why some take comfort in the fact that the economy is “only” stuck in stagnation and has avoided a more severe recession. And, indeed, things could have been worse. But this should be no reason for any complacency. On the contrary, even if the worst of the weakening in sentiment seems to be behind us, the hard economic reality does not look pretty. In fact, the economy seems to be on track for another quarter of contraction in the final quarter of 2023 and even the start of 2024 does not yet look really promising. At least in the first months of 2024, many of this year’s drags on growth will still be around and will, in some cases, have an even stronger impact than in 2023. Just think of the still-unfolding impact of the European Central Bank's monetary policy tightening, the potential slowing of the US economy and new uncertainty stemming from recent fiscal woes. Only a turn in the inventory cycle can bring some relief in early 2024, although this turn has not happened yet. All in all, we expect the current state of stagnation and shallow recession to continue. In fact, the risk that 2024 will be another year of recession has clearly increased. It would be the first time since the early 2000s that Germany has gone through a two-year recession, even though it could prove to be a shallow one.

JPY: Big swings in sight as BoJ announces policy The Bank of Japan has started its two-day meeting, with the announcement due early in the morning tomorrow (London time). Bank officials have already tempered rate hike expectations for this month by saying such a move is still premature. Still, with investors now actively betting on the end of negative rates in January, the language at this meeting will be key for the short-term performance of the yen. Governor Kazuo Ueda (pictured) is facing the options of either keeping the message broadly unchanged and disappointing the market’s hawkish expectations or offering hints about the state of the discussion on a rate hike and potentially suggesting a tentative timing. The good performance of the yen recently as global rates declined is surely taking off some pressure, but data is starting to prove increasingly inconsistent with the ultra-dovish stance of the BoJ. Our economist is still leaning toward 2Q24 for the first hike, and if that is the preference of the BoJ as well, then it may be too early for a real change in the dovish message later, and the yen risks a downward correction. However, the chances of a hike in January when new economic projections are released are non-negligible and depend on data as well as on JPY performance. Expect any hawkish surprise in communication tomorrow to push USD/JPY close to the 140 support, whereas an unchanged message can bring the pair back to 145, where we could see selling interest if the dollar momentum proves soft.

GBP: Eyes on inflation this week This week, the focus in the UK will be on CPI data for November out on Wednesday. As usual, we'll be paying attention to services inflation, which we estimate to come in at 6.6%, showing little near-term progress. That may help markets ease some of the rate cut bets in the UK and help the pound. Markets are still pricing in four rate cuts by the Bank of England this week despite the Bank’s attempt to discourage dovish bets via in-meeting communication. We still think services inflation in the UK will ease to around 4% by next summer, allowing the BoE to start cutting, but the pound has decent room to benefit from some hawkish repricing in the short run. Last week’s 0.8550 lows in EUR/GBP may well be retested by the end of December.

EUR: Still eyeing 1.10 The euro stands a chance to end the year above 1.10, which seemed quite unlikely only a few weeks ago when the dollar was restrengthening and ECB rate cut bets were rising rapidly. Despite the diverging narratives which emerged from the ECB and Fed meetings last week, probably favouring more attempts at the 1.1000 key resistance into Christmas, a break higher is far from guaranteed. Firstly, the euro still has to deal with the domestic factors that triggered its previous underperformance. Today, the IFO figures will be watched quite carefully, while the rest of the week sees the final release of CPI figures. We’ll also need to see whether post-meeting comments by ECB officials diverge in some way from last week’s pushback by President Lagarde.

FX Daily: One last big central bank meeting The dollar is recovering some ground after the pushback from Fed officials against rate cut bets. However, the dovish Dot Plot may work as an anchor for rates and keep the dollar soft into the end of December. In Japan, the BoJ announces its policy in the early hours of tomorrow, and that will direct market expectations about a January hike.   USD: Softer into year-end? The last few days of market action, before volumes dry up for Christmas, should continue to revolve around the “tug of war” between Fed officials trying to temper rate cut speculation and investors who have instead seen a validation of dovish bets from last week’s Dot Plot projections. Data can tip the scale in these situations, so consumer confidence, personal spending, and PCE figures should move the market this week. We don’t expect the last bits of US data in 2023 to paint a very different picture, though. Ultimately, the Dot Plot surprise should keep providing an anchor for rates into the new year and prevent a major dollar rebound in a period that is also seasonally unfavourable for the greenback. It will, however, be important to see how much louder the post-meeting pushback against rate cut bets by Fed officials will be. We’ll hear from Chicago Fed President Austan Goolsbee today and Raphael Bostic tomorrow, but with Christmas getting closer, there will obviously be fewer chances to collect FOMC members’ remarks. Today, the US calendar is otherwise quiet, and the FX market will primarily focus on the Bank of Japan announcement overnight (more in the JPY section). We expect DXY to stabilise around 102/103 into year-end, but risks are skewed to the downside.

How much floating rate debt should you have? We see the US as the key reference for identifying the optimal mix between fixed and floating rates. But other markets are worth looking at, as they throw up differing circumstances. The eurozone and Australia have an extreme horse-shoe efficient frontier. The UK has a linear trade-off between risk and cost, while Japan's is inversed. Recently, we published a short report that sought an optimal fixed versus float rate mix for a liability portfolio. We identified 17.5% as an optimal proportion of floating rate debt, one that managed to minimise volatility and achieve a 30bp reduction in interest rate costs relative to being 100% fixed. We also showed how further rate cost reductions could be considered by adding more floating exposure while not moving too far from the bottom of the hook of the efficient frontier. Efficient Frontier between rate cost and volatility for the US Employs data back to 1988 and contrasts 3mth versus 10yr SOFR (spliced to Libor) Note: This is based on not timing the market and comparing a rolling 3-month exposure to a rolling 10yr one. In reality, the 10yr exposure would be more mark-to-market in effect. As the global benchmark, we believe that US circumstances best represent the interest rate versus volatility trade-off over the long term. The Federal Reserve sets the global risk-free rate, and the US rates market has a dominating influence on other markets. That being said, what about those other markets? We’ve made some selections, and they all have their own stories. We find some quite stark differences but also find differing circumstances. The eurozone efficient frontier has an extreme horseshoe profile, as does Australia In the eurozone, some unusual circumstances occur. Being 100% fixed has come with both the highest funding costs and the highest volatility. The lower volatility for floating rate debt is unusual. It can be rationalised by the stability brought to the front end from extreme ECB policy and a pre-pandemic lost hope that the ECB would ever move away from the anchor of near-zero rates. Hence, being 100% floating resulted in the lowest average funding costs and lower volatility compared with being 100% fixed. But diversification benefits are also clear from the efficient frontier, where a combination of 60% floating and 40% fixed resulted in the lowest volatility. At the inflection point, there is a 75bp reduction in funding costs relative to being 100% fixed (2.8%), and funding costs are only 40bp higher compared with 100% floating (1.6%).     Efficient Frontier between rate cost and volatility for the eurozone and Australia     Australia is an interesting one. Its efficient frontier has a similar profile to that of the eurozone, but without the extended zero interest rate policy that helps to explain the unusual look. The overall averages for Australia are higher versus the eurozone (both the average rate cost and volatility). Gleaning from the efficient frontier, we find that something close to a 50:50 fixed versus floating rate mix has acted to minimise volatility. By doing so, there is a 50bp reduction in interest rate costs relative to being 100% fixed (5.2%). And at that inflection point, the interest rate cost is 70bp higher than being 100% floating (3.95%). There is value to diversification.   No efficiency on the UK frontier, just a straight trade-off. In Japan, it's even inversed Now, we move to two contrasting and unusual outcomes for differing reasons. First Japan. We see here an extreme example of the control that the Bank of Japan (BoJ) has had on keeping front-end rates on the floor (or through it) for an extended period of time. Funding costs from being 100% floating are exceptionally low. And that has come with minimal volatility. So, being 100% fixed has been higher in both funding costs and volatility. At the same time, the level of funding costs and volatility are lower than being 100% floating or fixed versus any other centre. We also find that while there is a clear but perverse trade-off between interest rate cost and volatility, in the sense that fixed-rate debt and higher funding costs come with higher volatility. The efficient frontier is practically a line slanted the “wrong” way and identifying no efficiencies; it’s just a straight-line frontier. Factor past BoJ policy as the chief influencer here.   Efficient Frontier between rate cost and volatility for the Japan and the UK Employs GBP swap data back to 1993, AUD bank data back to 1996 and contrasts 3-month versus 10yr     Then we move to UK circumstances. Here, we also find a straight-line frontier. It almost looks stereotypical in the sense that fixed-rate funding is more expensive and higher in volatility versus floating. However, the frontier fails to “hook” at the high rate / low volatility area and thus fails to identify an efficient inflection point. So, we don’t get to a lower volatility outcome through diversification. We can force an inflection through the choice of data periods, but we prefer to present the full dataset and observe the results. Here, there is a trade-off between floating and fixed-rate debt, but no answer as to how much is in each bucket.   If in doubt, use the US efficient frontier as the 'go to' reference So, where does this leave us? While the centres identified have interesting and contrasting outcomes, we view these as mostly a function of unique circumstances. It is certainly the case for Japan, and likely for the eurozone too. It is possible they get repeated and thus reflect the future. But it is more probable, in our opinion, that the US outcome will prove a more valid reference when making choices on the fixed versus floating choice set going forward. The UK efficient frontier is closest to the US one but misses the key hook that identifies the benefits of diversification. We'd override that by imposing the US frontier outcome on UK liability portfolios. Australia is a bit of an enigma, though. Of the markets considered, it has the greatest chance of deviating from the US-styled outcome that we favour as the central reference. But if in doubt, follow the US efficient frontier outcomes when planning for the future.  

EUR: Gauging the ECB pushback Attention turns to the ECB today. Investors are currently pricing in over 125bp of rate cuts next year, with the first full cut priced for the April meeting. We think that is far too early. However, the question today is how far ECB President Christine Lagarde wants to push back against that. Feeding into the story will be revisions to ECB staff growth and inflation forecasts. The larger the downward revisions to both growth and inflation (e.g. if the 2025 CPI forecast gets cut below 2%), the more euro money market rates will soften, and the euro will lag other currencies as they advance against the softer dollar.  Our ECB market preview felt there were upside risks to EUR/USD going into this ECB meeting. EUR/USD has already enjoyed a strong rally on the back of the softer US rate view, and assuming the ECB does not fully embrace dovish expectations for next year, we would say the bias for EUR/USD lies towards 1.0945/65 and probably 1.10 multi-day. Over recent months, we have been forecasting EUR/USD to end the year somewhere near 1.07. After last night's Fed shift, we expect EUR/USD ends the year closer to 1.10 now. Also, today look out for the Norges Bank and Swiss National Bank meetings. Presumably, the SNB will cut its inflation forecasts. Having consistently sold FX since last year – delivering nominal Swiss franc appreciation and keeping the real Swiss franc stable – we are interested to hear today whether the SNB has been both buying and selling FX. If it confirms it is on both sides of EUR/CHF, rather than just being a EUR/CHF selle, and we suspect EUR/CHF can jump back up to the 0.9550 area.

FX Daily: Fed brings tidings of comfort and joy In a somewhat surprising move, the Fed has acknowledged recent disinflation trends and poured gasoline on the fire of easing expectations for 2024. The news has understandably been greeted by global asset markets, where stagflationary bets are being replaced by reflationary ones. This is broadly dollar negative. Look out for the ECB, BoE and SNB today.   USD: Fed softens stance earlier than we thought Last night's FOMC release, dot plots and press conference surprised us and the markets. Instead of the Federal Reserve pushing back against the 100-125bp of rate cuts priced by the market for 2024, the overall message was a softer one. In effect, it welcomed disinflation trends and fed into the narrative that if inflation is under control, why does the US economy need very restrictive monetary policy in the form of a real policy rate above 2%?  Asset markets responded very well to the prospect of the Fed releasing the handbrake on the US and global economy, with both bond and equity markets rallying broadly. For us in FX, we had not expected it this early but last night's dovish Fed shift triggered a massive bull steepening in the US curve – a move that is the centre piece of our call for a broadly lower dollar next year. US two-year Treasury yields fell 30bp and the 2-10 year Treasury curve bull-steepened by 12bp. As discussed in our 2024 FX Outlook, we think this shift towards a more reflationary policy setting stands to see outperformance of the undervalued commodity currencies, and again, overnight the under-valued Australian and New Zealand dollars led the pack. We are also pleased to see EUR/AUD 3% lower over the last month, a move we highlighted in our outlook. Looking ahead, the focus switches to four rate meetings in Europe and to what degree the likes of the European Central Bank or the Bank of England do a better job than the Fed in pushing back against easing expectations for next year. If indeed they do a better job, it will only add to rallies in EUR/USD and GBP/USD. And the Fed's dovish turn last night continues to trigger an unwind in yen short positions as USD/JPY falls further. Next Tuesday's Bank of Japan policy meeting is eagerly awaited. Even though we do not look for any material adjustment in BoJ policy next week, USD/JPY may still well drop to 140 beforehand. Away from policy rate meetings in Europe, today sees US November retail sales and the weekly initial claims. Given the market firmly has the easing bit between the teeth, any signs of weakness in this data could trigger another leg lower in the dollar.  DXY has support at 102.50/65 below which the 100.80/101.00 area looms large.

FX Daily: Fed brings tidings of comfort and joy In a somewhat surprising move, the Fed has acknowledged recent disinflation trends and poured gasoline on the fire of easing expectations for 2024. The news has understandably been greeted by global asset markets, where stagflationary bets are being replaced by reflationary ones. This is broadly dollar negative. Look out for the ECB, BoE and SNB today.   USD: Fed softens stance earlier than we thought Last night's FOMC release, dot plots and press conference surprised us and the markets. Instead of the Federal Reserve pushing back against the 100-125bp of rate cuts priced by the market for 2024, the overall message was a softer one. In effect, it welcomed disinflation trends and fed into the narrative that if inflation is under control, why does the US economy need very restrictive monetary policy in the form of a real policy rate above 2%?  Asset markets responded very well to the prospect of the Fed releasing the handbrake on the US and global economy, with both bond and equity markets rallying broadly. For us in FX, we had not expected it this early but last night's dovish Fed shift triggered a massive bull steepening in the US curve – a move that is the centre piece of our call for a broadly lower dollar next year. US two-year Treasury yields fell 30bp and the 2-10 year Treasury curve bull-steepened by 12bp. As discussed in our 2024 FX Outlook, we think this shift towards a more reflationary policy setting stands to see outperformance of the undervalued commodity currencies, and again, overnight the under-valued Australian and New Zealand dollars led the pack. We are also pleased to see EUR/AUD 3% lower over the last month, a move we highlighted in our outlook. Looking ahead, the focus switches to four rate meetings in Europe and to what degree the likes of the European Central Bank or the Bank of England do a better job than the Fed in pushing back against easing expectations for next year. If indeed they do a better job, it will only add to rallies in EUR/USD and GBP/USD. And the Fed's dovish turn last night continues to trigger an unwind in yen short positions as USD/JPY falls further. Next Tuesday's Bank of Japan policy meeting is eagerly awaited. Even though we do not look for any material adjustment in BoJ policy next week, USD/JPY may still well drop to 140 beforehand. Away from policy rate meetings in Europe, today sees US November retail sales and the weekly initial claims. Given the market firmly has the easing bit between the teeth, any signs of weakness in this data could trigger another leg lower in the dollar.  DXY has support at 102.50/65 below which the 100.80/101.00 area looms large.

The Swiss National Bank appears slightly more dovish The SNB kept its key rate unchanged at 1.75%, as expected. Its message is slightly more dovish, but it doesn’t mean rate cuts are imminent.   A slightly more dovish message As expected, the Swiss national bank decided to keep its key rate unchanged at 1.75% at its December meeting, its level since June 2023. The SNB's communication is more dovish, indicating that they are clearly not considering any further rate hikes. Against a backdrop where consumer price inflation stood at 1.4% in Switzerland in November, the 6th consecutive month below 2%, this is not surprising. But the SNB is going a little further than that. First, it has revised its inflation forecasts downwards. It is now forecasting average inflation of 2.1% in 2023, 1.9% in 2024 and 1.6% in 2025, compared with 2.2%, 2.2% and 1.9%, respectively, at its previous meeting. The SNB is still expecting inflation to rebound in the coming months on the back of higher energy prices, rents and VAT. Nevertheless, it acknowledges that inflation has been weaker than expected in recent months and that "In the medium term, reduced inflationary pressure from abroad and somewhat weaker second-round effects are resulting in a downward revision". The inflation forecasts for the entire period are, therefore, within the price stability range, defined by the SNB as being between 0 and 2% inflation. According to the SNB, the balance of risks for inflation forecasts is also well balanced, with the risks of an upside surprise being as great as those of a downside surprise. In addition, although it still states that it is "willing to be active in the foreign exchange market as necessary", it no longer explains how. In recent quarters, the SNB has been buying Swiss francs to reinforce its appreciation, which has had the effect of reducing imported inflation but has also worsened the competitiveness of domestic exporters. The SNB no longer seems to favour the idea of an even stronger Swiss franc and could now start selling the currency again, which would support exports and, therefore, economic growth in Switzerland. This is a major change for the SNB.   But rate cuts are not just around the corner The message is, therefore, slightly more dovish. However, there is nothing to suggest that rate cuts will be forthcoming soon. Firstly, the SNB's target is asymmetrical, as it wants to achieve inflation of between 0 and 2%. Today's inflation forecasts fall squarely within this target, and the SNB expects inflation to be at 2% in the second and third quarters of 2024. These inflation forecasts offer little argument for an imminent rate cut. In addition, the SNB has a tool to steer monetary policy other than its policy rate: its interventions on the foreign exchange markets. It is likely to use this instrument first and start selling Swiss francs before considering rate cuts. It confirmed this between the lines during the press conference. Finally, the SNB's key rate is at 1.75%, a fairly unrestrictive level close to the level of expected inflation. Past interest rate rises are, therefore, much less damaging to the economy than they are in the United States and the Eurozone.   Against this backdrop, the SNB is likely to take a much longer pause than the Fed and the ECB. Rate cuts will probably come, but much later than the other central banks. At this stage, we are expecting the first rate cut to come in December 2024, compared with the first rate cuts expected in the first half of the year for the Fed and the ECB. Moreover, the scale of the rate cuts is likely to be much smaller than elsewhere. Total rate cuts in 2024 and 2025 could be in the region of 50bp or even a maximum of 75bp in Switzerland.   FX: SNB no longer focusing on FX sales The SNB confirmed today that it is no longer focusing on FX sales. This is consistent with our EUR/CHF update in our 2024 FX Outlook published last month and supports our view that EUR/CHF can remain stable near 0.95/0.96 next year. 

Agriculture – Argentina peso devaluation weighs on grains Wheat, soybean and corn traded soft yesterday after Argentina devalued its currency against USD by more than 50%. A lower exchange rate could bring more of Argentina’s supplies (especially inventory) into the market as prices in local currency increase. Meanwhile, the Rosario Board of Trade increased wheat production estimates in the country by around 1mt to 14.5mt for the 2023/24 season on account of favourable weather (rains and cooler temperatures). The Board kept soybean and corn production estimates unchanged for now at 50mt and 56mt respectively.   The latest data from Ukraine’s Agriculture Ministry shows that grain exports so far in the 2023/24 season stood at 14.7mt as of 13 December, a decline of 27% year-on-year. Total corn shipments stood at 7.3mt, down 32.7% YoY, while wheat exports fell 15% YoY to 6.3mt. Recent developments in Russia were reported to have damaged grain storage facilities and warehouses at the Odesa ports, which continue to impact the shipments through the Black Sea Port route.

Metals – Dovish comments from the Fed push gold higher Gold prices got a boost yesterday following dovish comments from the US Fed. While the central bank kept its policy rates unchanged at the last meeting of the current year, it recognised that the inflation pressure is easing. The Fed now projects three rate cuts in 2024 (total 75bp) compared to its September projections of two rate cuts for next year which buoyed sentiment for broader financial markets. ING’s economics team believes that the economic conditions could push the Fed to be more aggressive in rate cuts than their current projections with expectations of around 150bps cuts in 2024. Lower rates are likely to continue supporting gold. The Western Australia government has conditionally approved mining plans of Alcoa for its mining activities in the region. The approvals allow Alcoa to continue mining activity even if the Environment Protection Agency determines that an assessment is required. The continuation of mining activity removes some supply-side risk for aluminium.

The Commodities Feed: Sentiment improves The dovish comments from the Federal Reserve helped to improve sentiment yesterday, with gold prices recovering back to around US$2,030/Oz. Crude oil prices also gained on OPEC and EIA reports, although demand concerns continue to linger.   Energy – OPEC expects a tighter oil market The oil market recovered moderately yesterday as positive sentiment in the broader financial market pushed up oil prices as well. The monthly report from OPEC was constructive, with estimates of a huge deficit for the current quarter and next quarter. However, the market remains cautious as economic concerns continue to cloud demand prospects.   In its latest Monthly Oil Market Report, OPEC estimated a tighter crude oil market for the fourth quarter of this year and 2024 as supply falls short of market demand if announced OPEC+ cuts are maintained. The OPEC revised down its non-OPEC crude oil production estimates by around 190Mbbls/d for the fourth quarter on lower output in the US and Asia. The requirement for OPEC crude is estimated at around 31.1MMbbls/d for the fourth quarter compared to around 27.9MMbbls/d of production in the quarter so far. For 2024, the organisation expects the requirement for OPEC crude to increase by around 0.8MMbbls/d to 29.9MMbbls/d.   Meanwhile, OPEC also reported that crude oil production by member countries dropped marginally by 57Mbbls/d in November to 27.8MMbbls/d. Iraq and Angola reported major production losses of 77Mbbls/d and 37Mbbls/d respectively whilst Venezuela, Libya and Kuwait increased supplies at a moderate pace. OPEC production has largely been flat at around 27.8-27.9MMbbls/d for the last three months. The weekly report from the EIA has also been positive for the oil market yesterday, with crude oil inventory in the US falling by 4.3MMbbls over the last week against market expectations of around 1.5MMbbls of inventory withdrawal. Crude oil input to refineries increased by 0.2MMbbls/d to around 16MMbbs/d that have helped to increase demand for crude oil. Exports of crude oil remain constrained, largely due to congestion in the Panama Canal, with net imports increasing by 0.3MMbbls/d to 2.2MMbbls/d. Among refined products, gasoline inventory increased by 0.4MMbbls to 224MMbbls while distillate inventory also increased by 1.5MMbbls to 113.5MMbbls.

Philippines central bank leaves key rate untouched to close out the year BSP kept policy rates unchanged at 6.5% at their last meeting for the year.   BSP maintains policy rate at 6.5% The Bangko Sentral ng Pilipinas (BSP) retained policy rates at 6.5% today, in line with market expectations. The BSP continues to use the “risk-adjusted” forecast as opposed to the baseline inflation forecast, which was lowered to 4.2% (from 4.4% previously). For 2025, thecentral bank expects inflation to settle within target at 3.4%.  BSP Governor Eli Remolona indicated that risks to the inflation outlook remain “substantially tilted to the upside” while also sharing that growth prospects for next year remain “firm”.  Remolona indicated that inflation expectations are now anchored, citing their private sector analysts survey. Previously, the BSP justified their off-cycle rate hike by indicating that consumer expectations for inflation were elevated.    BSP keeps policy rates untouched as inflation moderates   BSP on hold but not likely to cut anytime soon Remolona indicated that they would be monitoring the response of households and firms to tighter monetary policy, suggesting they would be waiting to see the impact of previous rate hikes on the inflation path. The central bank will likely extend its pause until inflation is “well-within” target and until inflation expectations are anchored.  We expect the BSP to be on hold well into 2024, with potential rate cuts only likely to be considered towards the end of next year.  

Rates Spark: Does the Fed know something we dont? The surprise from the FOMC was partly the extra 25bp implied cut added to 2024, but it was more the lack of pushback from Chair Powell on the 2024 rate cut narrative. He almost endorsed it, which leads us to question whether he knows something of significance that we don't. Today's focus is on the ECB and BoE policy meetings.   Chair Powell validates the move from 5% to 4% on the 10yr yield Such was Federal Reserve Chair Jerome Powell's phraseology at the press conference that one must suspect that he knows more than we know. And its not about the macro data. We can see that. It's more about what the Fed might be seeing under the hood. Perhaps in commercial real estate, or single family residential rentals or private credit, or another other area of the system that might find itself overexposed to rate hikes delivered, under water and vulnerable to breaking. We don't know of course, but a Fed chair that stands up asserts that he understands the dangers they run by keeping rates too high for too long is one that looks like he's ringing alarm bells. Along with the Fed, the market too has added an additional 25bp rate cut for 2024, now at 150bp cumulative. The entire curve has shifter lower, led by real rates. The 2/10yr curve has gapped steeper too. This is a meaningful outcome. The question now is whether the 2yr can really break free and head lower as a driver of the yield curve, steepening it out from the front end. That traditionally happens on a three month run in ahead of an actual rate cut. We’re on the cusp if this, but not quite there just yet. It’s been a remarkable ongoing market move, especially as it has been interlaced with some tailed auctions, indicative of resistance to the falling market rates narrative (in the long end). But there’s been little from Chair Powell and the FOMC to stand in the way of this. Recent data has not really validated the dramatic fall in yields. But today the Fed has helped to do so. A far more hawkish Fed had been anticipated. The question ahead is where is fair value for the 10yr. We think it’s 4%. It’s premised off the view that the funds rate gets to 3% and we are adding a 100bp curve to that. We are about to sail below 4% though as a theme for 2024, with 3.5% the target. But the move below 4% towards 3.5% will be an overshoot process. If something breaks, we fast track all of that and jump to a new environment. That has not happened as of yet, but we think the stakes have risen.   ECB to push back against early cut expectations With a first rate cut more than fully discounted by April and on overall anticipated easing of 135bp over 2024, the market’s expectations of European Central Bank policy stand in stark contrast to the official line of rates having to remain high for longer. But since the last meeting in particular the inflation data has surprised to the downside, which even influential ECB officials like Isabel Schnabel had to acknowledge. The prospect of further hikes is clearly off the table, but she warned that central banks will have to be more cautious. That also meant that the ECB should be more careful with regards to making statements about what will happen in the next six months. The ECB’s new growth and inflation forecasts will have to be lowered, the crucial question is just by how much. Also taking it from Schnabel, the ECB is unlikely to give any longer rate guidance, which would only mean a truer meeting-by-meeting and data dependent approach. Still, the ECB is unlikely to endorse the aggressive market pricing, especially that of cuts already early in the year. So far the communication has been that one is particularly concerned about the development of upcoming wage negotiations which makes pricing for March rate cuts look premature. But how can the ECB still convey a hawkish tilt? One possibility is using communication about plans to shrink the balance sheet. We do not think there will be concrete decisions yet, but the ECB could state that it has begun discussing to potentially end PEPP reinvestments earlier than planned.   BoE likely reiterate rates will stay restrictive for an extended period Expectations of policy easing have further deepened ahead of today’s Bank of England monetary policy committee meeting. A first rate cut is now fully discounted by June with an overall expected easing of close to 100bp over 2024. One reason for growing expectations was a downside surprise in wage growth which saw private sector regular pay growth fall to 7.3% year-on-year from 7.8% YoY. Another trigger was yesterday’s disappointing GDP growth for October which means we are potentially on track for a fractionally negative overall fourth quarter figure. The BoE is likely to reiterate the guidance from November, where it said it expected rates to stay restrictive for “an extended period.  A hold is also widely anticipated by the market, but the recent data could convince some of the three MPC’s hawks who had still voted for a hike in November to back down from that position toward a ‘no change’.    Today's events and market view The central bank meetings are clearly the focus today given how far market expectations of policy easing have come. There may well be some disappointment in store for pricing of rate cuts as early as March. But further out we must acknowledge that the shift lower in rates is also driven by a drop in inflation expectations. The 10Y EUR inflation swap for instance has come down all the way from levels closer to 2.6% in October to currently 2.15%. Even central banks themselves have become more positive about the disinflationary tendencies taking hold. On the heels of the FOMC meeting rates markets in the US will look out for the initial jobless claims as well as retail sales data today. we will also get import and export prices.

Surprise dovish twist By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   The Federal Reserve (Fed) wraps up the year with a resounding finale. The Fed is not bothered to see the US yields fall in preparation for a rate cut. On the contrary, they endorsed the idea of a policy pivot thanks to an encouraging fall in inflation and sounded way more dovish than everybody expected at their announcement yesterday – which clearly exposed that the policy pivot is coming. This is the major take of the final FOMC meeting of the year, and it was totally unexpected. Jerome Powell still said – just for the sake of saying – that 'it is far too early to declare victory' over inflation, but the committee lowered their inflation forecasts for this year and the next, and the so-called dot plot – which plots where the Fed officials see the interest rates going – plotted a 75bp cut in Fed funds rate next year. The median expectation now suggests that the Fed rate will be lowered to 4.6% by the end of next year. And that's quite a big change compared to last time the Fed President spoke to say that the rates would stay high for long. It now appears that the rates won't stay high for so long. The first Fed rate cut is now expected to happen in March, with more than 85% probability.  As a result, the US 2-year yield – which captures the Fed rate bets – sank to 4.33% yesterday, and with the dovish message that the Fed sent to the market, the 4.50% level that I saw as a support at the start of this week should now act like a resistance. The US 10-year yield sank below 4%, reflecting the idea that the policy pivot suggests some meaningful slowdown in the US economy. The falling yields sent the S&P500 above the 4700 mark, to the highest levels in almost two years and the Dow Jones Industrial Index hit a record high. There is no reason to stop believing that the S&P500 will soon renew record as well, unless there is a meaningful decline in earnings expectations.   The dovish Fed echoed loudly across the FX markets as well. The US dollar was sharply sold, the EURUSD rebounded back above the 1.09 level, Cable extended gains to 1.2650 and the USDJPY fell almost 1.80% yesterday and slipped below the 141 level this morning. Trend and momentum indicators are comfortably negative, the fundamentals – meaning the narrowing divergence between the more dovish Fed and the more hawkish Bank of Japan (BoJ) – are comfortably positive for the yen, hence price rallies in the USDJPY are now seen as opportunities to strengthen the short USDJPY positions.  Now today, it's the European Central Bank (ECB) and the Bank of England's (BoE) turn to give their final policy verdict for this year. And both Mme Lagarde and Mr. Bailey are certainly annoyed to see the Fed go so soft yesterday, as Christine Lagarde had said herself that no reduction in rates should be expected in the next few quarters. It will be interesting to see if ECB and BoE officials feel comfortable about giving up their tough stance. I still believe that Lagarde will repeat that it's too early to talk about rate cuts, in which case we could see the EURUSD jump above the 1.10 level and finish the year above this level.   Across the Channel, the situation is less obvious. The UK economic outlook is not bright, and wages show signs of slowing. One big argument is that inflation has more than halved in the UK since the start of this year. Yes. But inflation in the UK – though halved – stands at 4.6% which is more than twice the BoE's 2% target. The latter makes the BoE less inclined to initiate rate cuts compared to the other two major central banks.   

The 2-day rebound seen in USD/JPY has reached 146.20/70 minor resistance zone. The movement of USD/JPY in the past month has a significant direct correlation with the US 10-year Treasury/10-year JGB yield spread. The short-term to medium-term trends of the US 10-year Treasury/10-year JGB yield spread remain bearish. Watch the 146.70 key short-term resistance on USD/JPY. This is a follow-up analysis of our prior report, “USD/JPY Technical: Potential counter-trend rebound within medium-term downtrend” published on 8 December 2023. Click here for a recap. USD/JPY has rebounded and hit the short-term resistance zones of 144.80/145.30 and 146.20/70 as highlighted in our previous analysis reinforced by the better-than-expected US non-farm payrolls data for November and a media report released yesterday, 11 December that stated the Bank of Japan (BoJ) officials were in no rush to scrap short-term negative interest in the upcoming 18 to 19 December monetary policy meeting according to sources. This latest set of “BoJ’s monetary policy thought process” reported by the media contrasted with the hawkish remarks made by BoJ Governor Ueda and Deputy Governor Himino last week that increased market speculations that the decade-plus of short-term negative interest rate policy in Japan may be scrapped sooner than expected. The USD/JPY extended its gains from last Friday and rallied by +0.86% to print an intraday high of 146.59 as seen in yesterday’s 11 December US session on the backdrop of the media report. It’s all about the yield spread between the US 10-year Treasury & 10-year JGB Fig 1: Movement of USD/JPY and US 10-year Treasury/10-year JGB yield spread as of 12 Dec 2023 (Source: TradingView, click to enlarge chart) Interestingly, the movement of the USD/JPY in the past month has moved in sync with the yield spread of the US 10-year Treasury/10-year Japanese government bonds (JGB) which can be considered as an indirect summation net effect of monetary policy guidance from the Fed and BoJ. Their current 20-day rolling correlation coefficient is at 0.90 which suggests that the movement of the US 10-year Treasury/10-year JGB yield spread has a significant direct influence on the movement of the USD/JPY. If the US 10-year Treasury/10-year JGB yield spread compressed (inched downwards), the movement of the USD/JPY reflected a similar directional move on the downside and vice versus if the yield spread expanded to the upside. Overall, the short to medium-term trend phases of the US 10-year Treasury/10-year JGB yield spread is still bearish as it continues to trend below its downward sloping 13-day moving average. Hence, it may put further downside pressure on the USD/JPY. USD/JPY’s recent minor rally may have exhausted Fig 2: USD/JPY short-term minor trend as of 12 Dec 2023 (Source: TradingView, click to enlarge chart) The price actions of the USD/JPY have staged a bearish reaction after 2-day of counter-trend rebound at the 146.70 short-term pivotal resistance (former minor swing lows area of 4/5 December 2023 & 50% Fibonacci retracement of the prior minor downtrend phase from 13 November 2023 high to 7 December 2023 low). In addition, the hourly RSI momentum indicator has flashed out a bearish divergence condition at its overbought condition during yesterday’s US session which suggests that the bullish momentum of the 2-day rally is likely to be exhausted. Near-term support will be at 144.20 and a break below it exposes the next intermediate support zone of 142.20/141.60 (coincides with the 200-day moving average). On the flip side, a clearance above 146.70 sees a potential extension of the counter-trend rebound towards the medium-term resistance zone of 147.40/148.60 (coincides with the downward sloping 20 and 50-day moving averages).  

Wage data highlights fragile state of UK economy ahead of holiday season The latest data from the Office for National Statistics reveals a deceleration in UK wage growth and a decline in job vacancies, reflecting a cooling labor market in the face of economic challenges and elevated interest rates. This moderation in wage growth comes at a time when the British economy faces a Christmas spending squeeze, emphasizing the ongoing fragility of economic conditions and risks posed by a misstep by the Bank of England which is expected to announce its decision this Thursday.    The muted wage growth may be viewed positively by the Bank of England as it prepares to make decisions on interest rates, indicating that the current high borrowing costs are effectively tempering economic activity and mitigating the risk of a wage-price spiral. Meanwhile, this economic context underscores the delicate balance the Bank of England aims to strike, with the cooling labor market potentially signaling a mitigating impact of elevated interest rates on economic overheating as the evolving dynamics of wage growth and job vacancies provide valuable insights into the broader economic landscape and the potential impact on consumer spending during the festive period.     

Decision week By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Friday's jobless report from the US was strong. It could've gone both ways, but it went well. The US economy added nearly 200'000 new nonfarm jobs in November, average earnings were higher than expected on a monthly basis, but stable around the 4% level on a yearly basis. That's twice the Federal Reserve's (Fed) inflation target and sticky, but it didn't bother much, and the jobless rate fell from 3.9% to 3.7%, as the participation rate slightly improved.   The stronger-than-expected jobs data sent the US 2-year yield to near 4.75%, and the 10-year yield recovered to 4.28%, but the stock traders gave a cheerful reaction to the news that the US jobs market is softening, not collapsing. The latest data suggests that the Fed is one step closer to realizing its Goldilocks scenario: it could win the inflation battle without pushing the economy into recession. Is it too good to be true? This week's inflation update and the Fed decision will tell.  The S&P500 traded at a ytd high on Friday, and Nasdaq closed a touch below its ytd high. The US dollar index recovered from the selloff of the day before which was mostly driven by a notable jump in the yen following the Bank of Japan (BoJ) Governor Ueda's confession last week that the BoJ's negative rates would get tougher to maintain from the end of the year. The USDJPY – which fell from above 147 to 142 in a single move – is now consolidating gains around 145 level as traders are out guessing whether the BoJ will exit the negative rates before the year ends. Elsewhere, gold slipped below $2000 per ounce, the EURUSD consolidates near its 100-DMA, near the 1.0760 mark, Cable is losing field on the back of a broad-based USD rebound and tests the 1.25 to the downside, while the AUDUSD hovers around its 200-DMA. The pair is still in the positive trend according to the Fibonacci retracement on the latest rebound, but on the verge of sinking into the bearish consolidation zone, as is the case for the other major peers.      

We think that the Polish statistical office is unlikely to markedly change its flash estimate of November CPI. As we expected, November brought a substantial increase in fuel prices when compared to October, while food prices also increased in monthly terms.   The decline in household energy prices turned out to be smaller than our forecast and core inflation moderated more than we had projected. The details of November's CPI reading should allow us to scrutinise the factors behind this lower core inflation print and potentially make some adjustments in the projected path of core inflation, depending on whether November's surprise was down to one-off drivers or was broad-based. Current account (Oct): €2200mn We forecast a large surplus on the current account balance in October on the back of a substantial improvement of the primary balance (a much smaller deficit than in the previous months) amid continued surpluses on both goods and services trade. According to our forecasts, exports fell by 3.2% YoY, while imports declined 11.1% YoY. The 12-month cumulative current account surplus improved to 0.8% of GDP vs. 0.6% of GDP after September.    

Norway: Norges Bank to keep rates on hold after all Back in September, Norway’s central Bank signalled that a December rate hike was likely. By November, policymakers were watering down those promises and said that further progress on the inflation outlook could lead to a pause. Since then, we’ve seen both a pronounced fall in oil prices and a big repricing lower in global rate expectations. Both are dovish from the point of view of Norges Bank’s model-based approach to setting policy. It’s a close call, but we think the balance has shifted in favour of no rate hike at Thursday’s meeting. Market pricing is leaning this way too

UK: Bank of England to offer push back against rising tide of rate cut expectations Financial markets are rapidly throwing in the towel on the “higher for longer” narrative that central banks have been pushing hard upon for months. Admittedly so far, that market repricing has been less aggressive for the Bank of England. But with three rate cuts now priced for 2024, the Bank of England is starting to sound the alarm. Governor Andrew Bailey said in recent days that he is pushing back “against assumptions that we're talking about cutting interest rates". Those comments followed a firming up of the Bank’s forward guidance back in November, where it said it expected rates to stay restrictive for “an extended period”. Expect that narrative to be reiterated on Thursday. A 6-3 vote in favour of no change in rates is our base case, and that matches the vote split from November. Could the Bank go further still and formally say that markets are overpricing 2024 easing in the statement? It hasn’t commented in this way since November 2022, in what was then a stressed market environment. We doubt they’ll do something similar this month. Policymakers may be uneasy about the recent repricing of UK rate expectations, but central banks globally have learned the hard way over the last couple of years that trying to predict and commit to future policy, with relative certainty, is a fool's game. The Bank will also be gratified that the data is at least starting to go in the right direction. Services inflation came in below the Bank’s most recent forecast. Markets may be right to assume that the BoE will be a little later to fire the starting gun on rate cuts than its European neighbours. But when the rate cuts start, we think the BoE’s easing cycle will ultimately prove more aggressive. We expect 100bp of rate cuts from August next year, and another 100bp in 2025.

Key events in developed markets and EMEA next week There's growing evidence that tight monetary policy and restrictive credit conditions are having the desired effect on depressing inflation. However, neither the Federal Reserve nor Bank of England will want to endorse the recent ramping up of rate cut expectations in financial markets as both prepare to release decisions next week.   US: Pushback from the Fed The Federal Reserve is widely expected to leave the Fed funds target range at 5.25-5.5% at next week’s FOMC meeting. Softer activity numbers, cooling labour data and benign inflation prints signal that monetary policy is probably restrictive enough to bring inflation sustainably down to 2% in coming months, a narrative that is being more vocally supported by key Federal Reserve officials. The bigger story is likely to be contained in the individual Fed member forecasts – how far will they look to back the market perceptions that major rate cuts are on their way? We strongly suspect there will be a lot of pushback here. The steep fall in Treasury yields in recent weeks is an easing of financial conditions on the economy and there is going to be some concern that this effectively unwinds some of the Fed rate hikes from earlier in the year.  We expect the Fed to retain a relatively upbeat economic assessment with the same 50bp of rate cuts in 2024 they signalled in their September forecasts, albeit from a lower level given the final 25bp December hike they forecasted last time is not going to happen. We think the Fed will eventually shift to a more dovish stance, but this may not come until late in the first quarter of 2024. The US economy continues to perform well for now and the jobs market remains tight, but there is growing evidence that the Federal Reserve’s interest rate increases and the associated tightening of credit conditions are starting to have the desired effect. We look for 150bp of rate cuts in 2024, with a further 100bp in early 2025.

We expect another Fed hold, but with pushback on rate cut prospects The Fed last raised rates in July and we think that marked the peak. There is growing evidence that tight monetary policy and restrictive credit conditions are having the desired effect on depressing inflation. However, the Fed will not want to endorse the market pricing of significant rate cuts until they are confident price pressures are quashed   Fed to leave rates unchanged, oppose market pricing of cuts The Federal Reserve is widely expected to leave the fed funds target range at 5.25-5.5% at next week’s FOMC meeting. Softer activity numbers, cooling labour data and benign MoM% inflation prints signal that monetary policy is probably restrictive enough to bring inflation sustainably down to 2% in coming months, a narrative that is being more vocally supported by key Federal Reserve officials. The bigger story is likely to be contained in the individual Fed member forecasts – how far will they look to back the market perceptions that major rate cuts are on their way? We strongly suspect there will be a lot of pushback here.   Markets pricing 125bp of cuts, the Fed will likely stick to 50bp prediction There has been a big swing in expectations for Federal Reserve policy since the last FOMC meeting, with markets firmly buying into the possibility of some aggressive interest rate cuts next year. Back on November 1st, after the Fed held rates steady for the second consecutive meeting, fed funds futures priced around a 20% chance of a final hike by the December FOMC meeting with nearly 90bp of rate cuts expected through 2024. Today, markets are clearly of the view that interest rates have peaked with 125bp of rate cuts priced through next year. Underscoring this shift in sentiment, we have seen the US 10Y Treasury yield fall from just shy of 5% in late October to a low of 4.1% on December 6th.   Federal Reserve rhetoric has certainly helped the momentum of the moves. Chief amongst them is the quote from Fed Governor Chris Waller suggesting that if inflation continues to cool “for several more months – I don’t know how long that might be – three months, four months, five months – that we feel confident that inflation is really down and on its way, you could then start lowering the policy rate just because inflation is lower”. The real Fed funds rate (nominal rate less inflation) is indeed now positive and we expect it to move above 3% as inflation continues to fall. Does it need to be this high to ensure inflation stays at 2%? We would argue not, and so too, it appears, do some senior members of the Fed. Other officials, such as Atlanta Fed president Raphael Bostic, suggest that the US hasn’t “seen the full effects of restrictive policy”. However, there are still some residual hawks. San Francisco Fed President Mary Daly is still contemplating “whether we have enough tightening in the system”.   ING's expectations for what the Federal Reserve will predict   Fed to talk up prolonged restirctive stance In that regard, the steep fall in Treasury yields in recent weeks is an easing of financial conditions on the economy and there is going to be some concern that this effectively unwinds some of the Fed rate hikes from earlier in the year. For example, mortgage rates have been swift to respond, with the 30Y fixed-rate mortgage dropping from a high of 7.90% in late October to 7.17% as of last week. With inflation still well above the 2% target despite recent encouraging MoM prints, we expect the Fed to be wary of anything that could be interpreted as offering an excuse to price in even deeper Fed rate cuts for next year and result in even lower longer-dated Treasury yields.   Consequently, we expect the Fed to retain a relatively upbeat economic assessment with the same 50bp of rate cuts in 2024 they signalled in their September forecasts, albeit from a lower level given the final 25bp December hike they forecasted last time is not going to happen.Fed Chair Jay Powell’s assessment in a December 1st speech is likely to be the template for the tone of the press conference. There, he argued, “it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so”. Similarly, NY Fed president John Williams expects “it will be appropriate to maintain a restrictive stance for quite some time”.   But the Fed will eventually turn dovish We think the Fed will eventually shift to a more dovish stance, but this may not come until late in the first quarter of 2024. The US economy continues to perform well for now and the jobs market remains tight, but there is growing evidence that the Federal Reserve’s interest rate increases and the associated tightening of credit conditions are starting to have the desired effect. The consumer is key, and with real household disposable incomes flatlining, credit demand falling, and pandemic-era accrued savings being exhausted for many, we see a risk of a recession during 2024. Collapsing housing transactions and plunging homebuilder sentiment suggest residential investment will weaken, while softer durable goods orders point to a downturn in capital expenditure. If low gasoline prices are maintained, inflation could be at the 2% target in the second quarter of next year, which could open the door to lower interest rates from the Federal Reserve from May onwards – especially if hiring slows as we expect. We look for 150bp of rate cuts in 2024, with a further 100bp in early 2025.   The Fed will try to keep the market rates impact to a minimum There may be some interest from the press on money market conditions following the spikes seen in repo around the end of the month and reverberating into the early part of December. It comes against a backdrop where banks' reserves are ample, in the US$3.3tr area. The last time the Fed engaged in quantitative tightening, bank reserves bottomed at a little under US$1.5tr and there was a material effect felt on the money markets. It’s unlikely that we'll get anywhere near that this time around. Bank reserves will certainly get below US$3tr and possibly down to US$2.5trn. The Fed will want to get liquidity into better balance as a first port of call, but beyond that, it won’t want to over-tighten liquidity conditions. Taking this into account, QT likely ends around the end of 2024. In the meantime, the clearest manifestation of quantitative tightening is to be seen in falling liquidity volumes going back to the Fed on the overnight reverse repo facility. This is now at US$825bn but will hit zero in the second half of 2024. Whether Chair Powell gets drawn into this will likely be down to whether the press wants him - they'll need to ask the question(s)! In terms of expectations for market movements, we doubt there will be much. If, as we expect, the Fed sticks to the hawkish tilt and does not give the market too much to get excited about, then expect minimal impact. As it is, the structure of the curve, as telegraphed by the richness of the 5yr on the curve, is telling us that a rate cut is not yet in the 6-month countdown window. That will slowly change, and we’ll morph towards a point where we are three months out from a cut and the 2yr yield really collapses lower. It's unlikely the Fed will change that at this final meeting of 2023, though, and they won’t want to.   Fed pushback could dent recent high-yield FX rally As mentioned above, a Fed pushback against market pricing of the easing cycle in 2024 should be mildly supportive of the dollar. Even though EUR/USD has performed poorly through the start of December and could get some mild support a day later from the ECB, this FOMC meeting could prompt losses to the 1.0650 area. We have had 1.07 as a year-end target for a few months now and expect the more powerful, dollar-led, EUR/USD rally to come through in 2Q when we expect those short-dated US yields to collapse. Perhaps more vulnerable to a decent Fed pushback against lower rates might be what we call the 'growth' currencies, such as the high beta currencies in Scandinavia and the commodity sector (Australian and Canadian dollars). These currencies have had a good run through November on the lower US rate environment. However, as per our 2024 FX Outlook, these currencies are our top picks for next year and should meet good demand on pullbacks this month. As to the wild ride that is USD/JPY, higher US yields could provide some temporary support. However, we doubt USD/JPY will sustain gains above the 146/147 area as traders re-adjust positions for a potential change in Bank of Japan (BoJ) policy on December 19th. We suspect that USD/JPY has peaked, however, and are happy with our call for USD/JPY to be trading close to 135 next summer after the BoJ starts to dismantle its ultra-dovish policy in the first half of next year. 

Japanese data improves but we still don’t expect a BoJ policy shift this month Although third-quarter GDP was revised down unexpectedly, the improved current account and cash earnings suggest a rebound in growth in the current quarter. Market speculation about the Bank of Japan's possible policy turnaround at the December meeting has been amplified after recent remarks from Governor Kazuo Ueda and Deputy Governor Ryozo Himino.   GDP contraction deepened in 3Q23 Third-quarter GDP was unexpectedly revised down to -0.7% quarter-on-quarter (seasonally adjusted) compared to the flash estimate and market consensus of -0.5%. The largest revision came from private consumption, which fell 0.2% (vs 0.0% in the flash estimate) and the inventory contribution to GDP, which was down by 0.2% ppt. The negative contribution of inventory should be a good sign for the inventory restocking cycle. But household spending still lagged amid high inflation despite relatively healthy labour market conditions, which should be a real concern for the Bank of Japan. We think that weaker-than-expected GDP could justify the Bank of Japan's current easing policy at least for now.   Meanwhile, GDP for the first quarter was revised up meaningfully from 0.9% to 1.2% resulting in an upward revision to annual GDP. Thus, now we expect 2023 GDP to rise 2.0% year-on-year.    However, other data releases today - labour cash earnings, household spending, and current account - point to a rebound in growth in the fourth quarter, thus we believe that the BoJ will shift its policy early next year.   Contraction deepened in 3Q23   Labour cash earnings rose in October Labour cash earnings rose 1.5% YoY in October (vs 1.2% in September, 1.0% market consensus) beating the market consensus. Contractual earnings gained steadily by 1.3% (vs 0.9% in September) while volatile bonus earnings (7.5%) rebounded after two months of declines. Also, hours worked bounced back 0.7% for the first time in four months, thus overall labour market conditions and earnings appear to have recovered in October. However, wage growth was still short of inflation growth, thus real earnings dropped 2.3% in October, although at a slower pace than the previous month's -2.9%.  Nominal wage growth continues and is clearly faster than the previous year. Also, there are several news reports that big companies plan to raise wages above this year's level of growth. Thus, we believe that next year's wage growth should accelerate a bit more than the current year.    Cash earnings and household spending improved in October   Current account surplus widened in October In a separate report, the current account surplus widened more than expected in October to JPY 2.6tn (vs 2.0 in September, 1.8 market consensus). Despite the global headwinds, the current account surplus will likely widen in the coming months. Due to falling commodity prices, the merchandise account will turn to surplus while an influx of foreign tourists will help the travel account to remain in surplus. We expect the trade of goods and services to improve in the current quarter.    Current account surplus in October led by service (travel)   BoJ preview Several remarks by the Bank of Japan, including Governor Ueda, have shaken the FX market quite strongly. Deputy Governor Himino said that ending the negative interest rate policy would have only a limited impact on the economy and Governor Ueda yesterday met with the prime minister, highlighting the importance of sustainable wage growth and inflation, which led to a fairly rapid shift in market sentiment betting on the Bank of Japan's policy tightening. Dollar weakness is also supporting the sudden move of the yen partially, especially ahead of today's release of the US nonfarm payrolls data.   It seems like the BoJ is paving the way to a gradual normalisation and giving the market a signal that the time is approaching. However, since these comments were made outside of the BoJ meeting, any sudden major change of policy is not expected this month. Yes, we remember that Governor Kuroda surprised the market with a yield curve control tweak last December, but we believe Governor Ueda is unlikely to adjust policy without prior communication. Thus, we expect some changes in the statement and dialogue from Governor Ueda at the BoJ meeting on 18-19 December.    As we have previously argued, we think the Bank of Japan's rate hike will come in 2Q24, most likely at its June meeting. By then, the BoJ will be able to confirm a solid wage increase with Shunto's results. In terms of inflation, it will trend down early next year, but still core inflation, excluding fresh food, is expected to remain above 2%. Even if the BoJ carries out a rate hike, we believe that the Bank's JGB buying operation will continue in order to avoid a rapid rise in long-term yields.

FX Daily: Yen bulls turn to US payrolls The big yen rally has been exacerbated by positioning factors, but markets may keep speculating on a BoJ December hike unless Japanese officials protest against hawkish bets before the meeting. A bigger upside risk for USD/JPY is today’s US payrolls, which could paint a still resilient jobs market picture, and help the dollar.   USD: Payrolls may ruin the party for the yen The exceptional rally in the yen remains the biggest story in FX at the moment. The size of the drop in USD/JPY and the volatile intraday price-action are a clear consequence of the heavy short positioning on the yen into this round of hawkish speculation on Japanese rates. USD/JPY net longs amounted to 42% of open interest on 28 November, as per the latest CFTC data. Despite technical factors such as positioning having exacerbated the yen moves, we’d be careful to call for a peak in the JPY rally just yet. First, because there is likely a lot more bearish JPY positioning to be scaled back by speculators, second – and most importantly – because markets may not have many incentives to unwind bets on a December BoJ hike unless Japanese or central bank officials step in to tame the speculation before the meeting. Our view remains that the BoJ would prefer to exit negative rates policy at either the January or April meeting, when the Outlook Report accompanies the policy decision and Governor Kazuo Ueda can use an upside revision in inflation to justify a rate hike. Incidentally, the final release of 3Q GDP in Japan signalled a worse economic contraction (-0.7% QoQ) than previously estimated. We’ll be looking at USD/JPY closely today not only to gauge how much markets continue to speculate on BoJ tightening but also in relation to US risk events. The US jobs figures for November are a key turning point for markets' ongoing speculation on Federal Reserve easing in 2024. The payrolls’ consensus number is 183k, but soft JOLTS job openings and ADP payrolls (despite the latter having no predictive power for official figures) suggest markets may be positioned for a weaker reading. Our economics team forecasts 180k, and we suspect the US jobs market may still prove a bit more resilient than expected – triggering some unwinding of dovish Fed bets and supporting the dollar. The US calendar also includes the December University of Michigan surveys; markets will mostly be moved by the inflation expectations numbers, which are expected to have declined. All in all, we see some upside risks for the dollar today. The high sensitivity of USD/JPY to US rates means that US payrolls could trigger a rebound in the pair. That said, the ongoing bullish momentum in the yen on the back of hawkish domestic bets means sellers of USD/JPY may re-emerge around the 145.0 area.  

Rates Spark: A bond market looking for validation Payrolls day is usually pivotal. This one more than most, as the US 10yr has fallen sharply from 5% down towards 4% without material evidence of any labour market recession. We don't have to have one, of course, as lower yields can also be validated by lower inflation expectations. But in the end, it probably does have to happen, or else bonds have issues ... The key event for the day is the US jobs report, the nonfarm payrolls Source:   Today's payrolls report will set the scene for the rest of 2023 It’s payrolls day! And it’s a key one. The US 10yr has moved sharply from 5% down to approaching 4%. It really needs some validation of that move from today’s report. Or to reverse engineer this, the Treasury market is telling us the number will be weak. But what is weak? The key reference is 150k. That’s the replacement rate. Average payrolls in the past few decades have been 130k per month. Anything below these numbers would be “weak”, as it would begin to signal a growth recession. This month’s number is bolstered by returning strike workers so that the consensus of 190k actually translates to something close to 150k – bang on the crossover point. Whatever happens, it will set the scene for the week ahead, one that kicks off with supply, featuring the 30yr auction which has had a habit of tailing. Any kind of payrolls “strength” would have to be a problem for this bullish bond market.   And then we have the Fed next week. Payrolls are likely more important We also have the Fed next week. There may be some interest in the press on money market conditions following the spikes seen in repo around month end and reverberating into the early part of December. This comes against a backdrop where banks' reserves are ample, in the US$3.3tr area. The last time the Fed engaged in quantitative tightening, bank reserves bottomed at a little under US$1.5tr and there was a material effect felt on the money markets. It’s unlikely that we'll get anywhere near that this time around. Bank reserves will almost certainly get below US$3tr and possibly down to US$2.5trn. The Fed will want to get liquidity into better balance as a first port of call, but beyond that, it won’t want to over-tighten liquidity conditions. Taking this into account, QT is likely to end around the end of 2024. In the meantime, the clearest manifestation of quantitative tightening is to be seen in falling liquidity volumes going back to the Fed on the overnight reverse repo facility. This is now at US$825bn, but is set to hit zero in the second half of 2024. Whether Chair Powell gets drawn into this will likely be down to whether the press wants him to - they will probably have to ask the questions(s). In terms of expectations for market movements, we doubt there will be much from the FOMC alone. If, as we expect, the Fed sticks to the hawkish tilt, and does not give the market too much to get excited about, then expect minimal impact. As it is, the structure of the curve, as telegraphed by the richness of the 5yr on the curve, is telling us that a rate cut is not yet in the 6-month countdown window. That will slowly change, and we’ll morph towards a point where we are three months out from a cut and the 2yr yield really collapses lower. It's unlikely the Fed will change that at this final meeting of 2023, though, and they won’t want to. Expect much more reaction from today’s payrolls report Today's events and market view The key event for the day is the US jobs report. The consensus for the change in non-farm payrolls has slipped somewhat to 183k, which compares to the 150k reported last month. The unemployment rate is seen staying at 3.9%. The other release to watch today is the University of Michigan consumer sentiment survey. It is seen improving marginally, while the inflation survey is expected to ease to 4.3% on the 1Y horizon and 3.1% on the 5-10Y. There is not much on the eurozone calendar, but the ECB will reveal how much of their outstanding TLTROs banks choose to repay ahead of time at the end of this month on top of the €37bn that will mature.

Elsewhere...  The nice jump in the Japanese yen pulled the dollar index lower yesterday. Of course, the EURJPY, GBPJPY and AUDJPY all made a similar move. The US bonds, on the other hand, were little changed yesterday – for once – as traders sat on their hands ahead of this week's much-awaited US jobs data, while technology stocks were on fire yesterday. Alphabet jumped more than 5% after Google released Gemini – the largest and most capable AI model it has ever built, and AMD jumped nearly 10% after the company unveiled a chip that will run AI software faster than rival products. But rival Nvidia was little hit by the news, as its chips gained 2.40% yesterday. The AI demand is big enough for everyone to benefit amply from it.   Today, all eyes are on the US jobs data.  According to a consensus of analyst estimates on Bloomberg, the US economy may have added 180'000 new nonfarm jobs in November, the pay may have risen slightly faster on a monthly basis, and the unemployment rate is seen steady at 3.9%. The fact that the data released earlier this week hinted at a clear loosening in the US jobs market makes many investors think that today's official data will also follow the loosening trend. If the data is soft enough, the rally in the US bonds could continue and the US 10-year yields could have a taste of the 4% psychological mark, while a stronger-than-expected figure could help scale back the dovish Federal Reserve (Fed) expectations but could hardly bring the hawks back to the market before next week's FOMC decision.      

The day has come.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Yesterday was finally the day that most FX traders have been waiting for since at least a year: the day where the Bank of Japan (BoJ) gave a hint that it will finally exit its negative interest rate policy. Precisely, the BoJ Governor said, after his meeting with the Japanese PM - that handling of monetary policy would get tougher from the end of the year. Indeed, the BoJ is buying a spectacular quantity of JGBs to keep the YCC intact at absurdly low levels compared with where the rest of the developed markets yields are following an almost 2-year long of aggressive monetary policy tightening campaign. At its highest this year – after the BoJ relaxed the rules on its YCC policy – the 10-year JGB flirted with the 1% mark, whereas the 10-year yield German bund yield hit 3%, the 10-year British gilt yield advanced to 4.70% and the US 10-year yield hit 5%. Certainly, inflation in Japan lagged significantly behind inflation in Western peers, yet inflation in the US is now exactly where inflation in Japan is: near 3%.   The BoJ's negative rate is the last souvenir of the zero/negative rate era and any small hint that things will get moving over there could move oceans. And this is what happened yesterday. The speculation that the BoJ will hike rates as soon as this month spiked to 45% soon after Mr. Kuroda's words reached investors ears. The 10-year JGB yield spiked to 0.80% from around 0.62% reached earlier this week in parallel with the falling DM yields. The USDJPY fell from 147 to 141 in a single move, and the pair is consolidating gains a touch below 144 this morning, as traders argue whether a December normalization is too soon or not. Fundamentally it is not: in all cases, the BoJ will start normalizing policy two years after the Bank of England (BoE) hiked its rate for the first time after a long period. And the BoJ will be normalizing its rates when all major central banks plateaued their tightening policy and when investors are out guessing when the normalization – toward the other direction – will begin. So no, fundamentally, it is not too early for the BoJ to start hiking its policy rate. But it would be a sudden move – that's for sure!   In any case, it is more likely than not that the fortunes of the Japanese yen turned for good this week. In the short run, consolidation is the immediate answer to yesterday's kneejerk rally – which took the USDJPY immediately into the oversold market conditions as the move was also amplified with many traders covering their short positions. But from here, yen traders will be looking to sell the tops rather than to buy to dips. A sustainable move below 142.60 – the major 38.2% Fibonacci retracement on this year's bullish trend – will confirm a return to the bearish consolidation zone, then the pair will likely take out the next major technical supports: the 200-DMA near 142.30, the next psychological support at 140 and should gently head back to – at least around 127 – where it started the year. But these forecasts will hold only, and if only, the BoJ doesn't make a sudden U-turn on its normalization plans. Remember, the BoJ didn't say it would normalize. It just said that it will be hard to handle the actual policy for longer. If one were to imagine, Governor Kuroda maybe spent last night looking at the ceiling and wondering 'what have I said!'. Funny thing is, the BoJ's rate normalization speculation comes a few hours before the country revealed a 2% fall in its GDP; obviously, the global policy tightening has been hard on the world economy, and Japan can't avoid the global slowdown winds. If it turns out, Japan might normalize its monetary policy when its economy begins to slow down.    

Norges Bank set to keep rates on hold amid lower energy prices Lower oil prices and growing anticipation of rate cuts from the global central banks have taken the pressure off Norway's central bank to hike rates one last time in December. We expect an on-hold decision but expect the bank's new rate projection to push back against expectations of imminent rate cuts in 2024. A hawkish hold should partly shield the krone.   Norges Bank promised a hike, but no longer needs to deliver Back in September, Norway’s central Bank signalled that a December rate hike was likely. By November, policymakers were watering down those promises and said that further progress on the inflation outlook could lead to a pause. We now think “no hike” is the most likely scenario next week, though it’s a close call. Market pricing is leaning this way too. Since the November meeting and the last forecasts produced in September, we’ve seen both a pronounced fall in oil prices and a big dovish repricing in global rate expectations. The former is assumed to weigh on oil investment and ultimately growth and the labour market. The latter removes one source of potential weakening pressure on the krone – or at least that’s true in theory. Norges Bank’s preferred trade-weighted exchange rate index is actually 4% weaker than assumed in the September forecasts. Still, the net effect of all of that should be a lower interest rate projection for coming months. Previously the projection saw rates peaking around 4.50% and staying there until the latter part of 2024. Assuming we don’t get a rate hike from Norges Bank on Thursday, we’d expect a lower peak rate in the projection and there’s a chance we also see a slightly earlier rate cut pencilled in. That said, we doubt policymakers will want to endorse the shift away from “higher for longer“ among investors over recent weeks. Ultimately though we do expect rate cuts next year and we think Norges Bank could end up following the Federal Reserve with easing, starting in the second quarter of next year   Norges Bank interest rate projections over time Still reasons to like NOK in the long-end Markets are pricing in around a 30% implied probability of a rate increase, meaning the risks are skewed to the upside for the Norwegian krone considering how close of a call this is set to be for policymakers. Our baseline is – as discussed – a hold, which should add a bit more pressure on the underperforming NOK, even though Norges Bank may well try to tame dovish speculation by signalling openness to more tightening if necessary. Ultimately, the impact on NOK should not be too material in the event of a hawkish hold, and the krone should quickly revert to being driven by external factors. Indeed, it’s been mostly external factors – namely the dollar recovery, worsening of the European economic outlook, softer oil prices – that have weighed on NOK of late. Domestically, the sustained pace of daily FX purchases in December (NOK 1.4bn) and dovish repricing have had a secondary but non-negligible influence. Expect CPI figures three days before the Norges Bank announcement to move NOK. Looking beyond the short-term underperformance, and despite a less hawkish Norges Bank, there is still a lot to like about NOK; it is deeply undervalued, has a relatively stable economic outlook, and good carry advantage. We continue to favour the krone against its oil peer the Canadian dollar, in 2024.

December’s ECB cheat sheet: A reality check for ultra-dovish expectations The ECB will almost surely keep rates on hold at the December meeting. The question is to what extent it will align with the market's aggressive pricing for rate cuts in 2024. We suspect it will fall short of endorsing ultra-dovish expectations. There is some upside room for EUR rates and the battered euro.       Heading into the European Central Bank's December meeting, there is growing evidence that the Governing Council is split about the messaging being presented to markets. The generally arch-hawk Isabel Schnabel dropped strong dovish hints by ruling out rate hikes this week, and markets are now pricing in 135bp of cuts in the next 12 months. We see a good chance that the overall message at this meeting will fall short of endorsing aggressive rate cut expectations. Above are the market implications in various scenarios. Our full ECB preview can be found here. A still-cautious ECB may not validate aggressive front end pricing A reassessment of inflation expectations has been in the lead in driving rates lower and raising the expectations of first rate cuts at the end of the first quarter next year. From next summer onwards, market indications point to anticipated headline inflation fixes below 2%. Indeed, the 2Y inflation swap has dropped to 1.8%. It is easy to overlook that at the same time, core inflation is currently still running at an elevated 3.6% year-on-year, giving the ECB enough reason to remain cautious. However, the pushback against aggressive market pricing has been half-hearted at best, with officials’ remarks having put cuts in the first half of next year clearly into the realm of possibility. But whether they're likely is a different question. The ECB may well decide to let the data be the judge – but at the same time, it remains more reluctant to extrapolate to the extent that the market does. Its own inflation forecast may come down next week, but potentially not to the degree that markets are discounting. We see a good chance that the rally in front end rates – which currently discounts a 75% probability of a cut next March – stalls, if not unwinds to some extent. The longer end may see less upward pressure, though. In the extreme, the Governing Council coming across as overly hawkish and brushing off the faster disinflationary momentum could push markets into the belief that a policy mistake is in the making.   ECB rate expectations   Lagarde can throw a lifeline to the unloved euroThe idiosyncratic decline of the euro has been one of the key themes in FX lately, with the common currency being the worst-performing currency so far in G10. The aggressive dovish repricing of ECB rate expectations has been the main driver, and the comments by Isabel Schnabel right before the pre-meeting quiet period have fuelled the bearish narrative further. With 125bp of cuts priced in by October and markets actively considering a start to the easing cycle already in March, it's difficult to see a bigger dovish repricing happening at this stage. That would suggest the euro does not have to fall much further from the current levels. Still, if only short-term rate differentials are taken into account, a decline to the 1.06 area in EUR/USD would not be an aberration. What is already halting the euro slump is the upbeat risk sentiment, which favours pro-cyclical currencies like the euro and caps the upside for the safe-haven dollar. We expect the ECB to continue its transition to a dovish narrative, but that will – in our view – happen at a slower pace than what markets are implying. We see tangible risks that the the central bank will push back against aggressive dovish speculations at this meeting, and the market may be forced to unwind some of those rate cuts bets, offering room for a EUR/USD rebound. That said, a EUR/USD recovery would struggle to extend much longer after the meeting due to the short-term EUR-USD swap spreads still pointing to a lower exchange rate.

Three calls for the Dutch economy in 2024 With 2023 being a year that included a technical recession and high but moderating inflation rates, here are our three calls of the outlook for the Dutch economy in 2024.   Dutch economy leaves recession The Dutch economy should exit the mild recession that so far has lasted three quarters. Forward-looking indicators for business activity have improved, while consumers have also recently become more upbeat. October figures for retail sales indeed seem to confirm that high wages combined with lower inflation translate into the return of growth of not only nominal consumer spending in 4Q23 but also the growth of consumption volumes. The increase in purchasing power continues into 2024, when the government will also contribute to higher net incomes, for example, via a further increase in the minimum wage and its related old age and welfare benefits.Partly thanks to an improving consumption outlook, the Dutch economy is expected to grow by a modest 0.7% in 2024, following economic stagnation in 2023 (0.2%). The largest contribution to economic growth in 2024 is however expected to come from the government. Demography and policy interventions increase public spending. The cooling of the global economy is expected to coincide with only a moderate export development for Dutch firms. Subdued demand expectations and increased financing costs are leading to a contraction in investment. So, despite the end of the recession, the growth rate is expected to remain below the country's long-term potential in the coming period. For our Dutch readers, we refer here to our more elaborate Outlook 2024 (published November 30th 2023).   Return of consumption growth calls Dutch recession to an end Expenditures* as index where fourth quarter of 2019 = 100   Strain in Dutch labour market not wiped out quickly The earlier contraction during 2023 and below-potential growth in the period ahead, combined with increasing bankruptcies and firm exits (now that the tax authority is enforcing inviable businesses to pay back the tax bill that was deferred as part of the Covid support programme) will weaken demand for workers somewhat. This is visible in the employment expectations of businesses.   Employment expectations of Dutch business deteriorated, but remain close to the long-term average Employment* expectations** of business for the next 3 months   We, however, believe that this will not translate into a very large increase in the unemployment rate. We expect the rate to rise moderately to a still relatively low number of 4.2% in 2024. While employment expectations of businesses have come down, they are still slightly above long-term averages, possibly signalling some labour-hoarding behaviour and mild optimism about a return of demand growth. Furthermore, ageing and the expansionary policies of the government, such as investment in greening the economy and in defence, will increase the semi-public sector's claim influence on the labour mark   3. Inflation falls below 2% despite core inflation not yet reaching usual levels In 2024, price pressures will clearly ease compared to 2023, when the HICP consumer price inflation rate was still high (4.2%). Items that will lower inflation in 2024 compared to 2023 include food, transport, transport services, hospitality services and education. Albeit less than in 2023, the energy bill will lower the inflation rate in 2024 too, despite the termination of the energy price cap. This time, the negative contribution of the energy bill comes from tax cuts and lower prices on the international wholesale market for energy. As such, the HICP headline inflation rate is expected to fall to a relatively "normal" 2% in 2024. Core inflation - the rise in prices without volatile goods such as food and energy - of 3.4% will still be at an unusually high level, but it is also coming down from a high 6.5% in 2023. A projected deceleration of wage cost increases will eventually help to reduce service inflation in 2024, which is part of core inflation, but this is expected to happen only gradually. In addition, although the expectations of firms outside the service sector about their sales prices have fallen considerably recently, they are still somewhat higher than on average in the past.   Consumer price inflation in the Netherlands falls below 2% Change in harmonised index of consumer prices year-on-year in % and contributions in %-points

Executive summary Same path, different journeys. 2024 should be the year in which many economies in Central and Eastern Europe, and Central Asia attempt to normalise their economies – be that through a return to growth, lower interest rates and/or better fiscal positions. The journey to that destination, however, will look very different depending on the government and central bankers in charge. When it comes to growth, most of the region, except Turkey, should witness higher growth rates next year. The aggressive rate hiking cycles that many in the region undertook starting in 2021 have served their purpose in turning the tide on inflation. Lower inflation will deliver some welcome real wage growth and private consumption will be a crucial driver of activity across the region next year. The degree to which lower inflation will allow monetary easing to support growth will look very different across the region. Disinflation seems most advanced in the Czech Republic, allowing a 300-400bp easing cycle. We forecast a similar magnitude of rate cuts in Hungary, though from a much higher level. Romania has been struggling with stickier inflation but may still cut rates by 150bp. Poland is the outlier here, where the central bank may well keep rates at 5.75% given the highest upside risk for GDP in the region and the structural opportunities that the new ruling camp may utilise to speed up the economy. Also, Poland has already surprised with 100bp of recent easing. Part of the differentiation in monetary policy may well be driven by the fiscal position. The Czech Republic stands out here in its plans for fiscal consolidation, while both Poland and Romania look set to keep fiscal policy loose – good for short-term growth, bad for inflation. Nonetheless, 2024 growth rates in CEE4 are all expected in the 1.4-3.0% region – substantially better than the 0.3% our team are forecasting for Eurozone growth. Expect politics to remain very much in focus too. Both Poland and Hungary will be keen to secure funds from the EU next year – with Hungary’s need more pressing. We take an optimistic view on the release of funds here, but will be keeping a close watch on the headlines. European parliamentary elections in June will also be very much in focus – with the outcome having some important implications for foreign aid to Ukraine. Romania has a presidential election next year and we see local elections in Turkey too. Talking of Turkey, policymakers have been impressing by their return to policy orthodoxy. A continuation of this policy – including restrictive monetary policy for the majority of 2024 – could well see a turn in the inflation profile by year end. This could see the continued re-assessment of Turkish asset markets by foreign investors. Elsewhere, we highlight Bulgaria’s continued pursuit of euro entry in 2025, we evaluate Croatia’s year in the eurozone and also extend our coverage across the CIS space. In terms of our feature articles, we take a fascinating look into the theme of ‘Carbon and Commodities’ across the region. Poland and the Czech Republic are spending as much as 1% of GDP in securing carbon emission allowances – an expenditure that is hitting their external accounts. And Hungary, Romania and Turkey remain very exposed to natural gas prices. We conclude it has never been a better and more urgent time to scale up investments in energy transition. As always, this Directional Economics showcases ING’s global reach with our local team of experts in the CEE region. Please reach out to them with any questions.

Bank of England to push back against rising tide of rate cut expectations Markets are pricing three rate cuts in 2024 and we doubt the Bank will be too happy about that. Expect policymakers to reiterate that rates need to stay restrictive for some time. But with services inflation coming down and wage growth set to follow suit, we think investors are right to be thinking about a summer rate cut. We expect 100bp of cuts next year.   Markets are ramping up rate cut bets, and Governor Bailey isn't happy about it Financial markets are rapidly throwing in the towel on the “higher for longer” narrative that central banks have been pushing hard upon for months. Even more remarkably, a small but growing number of policymakers from the Federal Reserve to the European Central Bank seem to be getting second thoughts too. So far, that market repricing has been less aggressive for the Bank of England. Investors are expecting three rate cuts next year compared to more than five over at the ECB. The first move is seen in June, as opposed to March over in Frankfurt. Despite that more modest adjustment, the Bank of England is starting to sound the alarm. Governor Andrew Bailey said in recent days that he is pushing back “against assumptions that we're talking about cutting interest rates". Those comments followed a firming up of the Bank’s forward guidance back in early November, where it said it expected rates to stay restrictive for “an extended period”. Its November forecasts, premised on rate cut expectations at the time, indicated that inflation may still be a touch above 2% in two years’ time. That was a hint, if only a mild one, that markets were prematurely pricing easing - and rate cut bets have only been ramped up since.   Rate cut expectations are building, though less rapidly than in the US/eurozone   Expect rate cut pushback on Thursday, but investors are right to be thinking about easing That gives us a flavour of what we should expect next week. While the chances of a surprise rate hike have long since faded away, there’s a good chance that the three hawks on the committee once again vote for another 25bp rate increase, leaving us with a repeat 6-3 vote in favour of no change. We only get a statement and minutes on Thursday, and no press conference or forecasts, so the opportunity to shift the messaging is fairly limited. But we expect the same hawkish forward guidance as last time, including the line on keeping rates restrictive for a prolonged period of time. Could the Bank be tempted to go further still and formally say that markets have got it wrong? The BoE has shown itself less willing than some other central banks to either comment directly on market pricing in its post-meeting statements, or make predictions about how it'll vote at future meetings. The last time it did this was in November 2022, where disfunction in UK markets meant rate hike pricing had reached an extreme level. We doubt they’ll do something similar this month. Policymakers may be uneasy about the recent repricing of UK rate expectations, but central banks globally have learned the hard way over the last couple of years that trying to predict and commit to future policy, with relative certainty, is a fool's game. The Bank will also be gratified that the data is at least starting to go in the right direction. Services inflation came in below the Bank’s most recent forecast, and while one month doesn’t make a trend, we think there are good reasons to expect further declines over 2024. Admittedly, we think services CPI will stay sticky in the 6% area through the early stages of next year, but by the summer, we expect to have slipped to 4% or below. Likewise, the jobs market is clearly cooling and that suggests the days of private-sector wage growth at 8% are behind us. We expect this to get back to the 4-4.5% area by next summer too. Markets may be right to assume that the BoE will be a little later to fire the starting gun on rate cuts than its European neighbours. But when the rate cuts start, we think the BoE’s easing cycle will ultimately prove more aggressive. We expect 100bp of rate cuts from August next year, and another 100bp in 2025.   Sterling benefits from the BoE position Sterling has enjoyed November. The Bank of England's trade-weighted exchange rate is about 2% higher. The rally probably has less to do with the UK government's stimulus and more to do with the fact that investors have been falling over themselves to price lower interest both in the US and particularly in the eurozone.  In terms of the risk to sterling market interest rates and the currency from the December BoE meeting, we tend to think it is too early for the Bank of England to condone easing expectations - even though those expectations are substantially more modest than those on the eurozone. This could mean that EUR/GBP continues to trade on the weak side into year-end - probably in the 0.8500-0.8600 range. Into 2024, however, we expect market pricing to correct - less to be priced for the ECB, more for the UK and EUR/GBP should head back up to the 0.88 area. But that's a story for next year.    Sterling trade-weighted index edges higher

2024 set to be the year that the hike cycle is felt The ECB hike cycle seems over, but the shockwaves of tightening will still shape the eurozone economy in 2024. Traditional lags in transmission are now accompanied by longer ones in average interest burden increases, potentially extending the impact of tightening. For the ECB, the risk of being behind the curve for the second time in one cycle is growing. The end of the hike cycle is most likely here. The ECB has raised interest rates aggressively - from -0.5% to 4% in just over a year. With inflation coming down quickly and the economy stagnating, it is hard to see how the ECB could continue hiking rates, either this week or in the coming months. Instead, the focus is shifting towards possible first rate cuts. This makes it an excellent moment to focus on how fast monetary transmission is happening and what to expect from the impact of this in 2024.   The initial impact of tightening was significant In March, we concluded that the early signs of a rapid impact on transmission channels were significant. Since then the pace has moderated a bit, depending on the channel. As back in March, we follow the ECB’s own categories of transmission channel. At the end of 2023, broad money supply is still contracting quickly, currently at an annual pace only seen in 2009. Bank rates for loans for households and businesses are still rising rapidly and the euro has broadly appreciated against the currencies of major trade partners since late summer - it is now slightly above levels seen at the start of ECB’s rate hikes. Asset prices have also corrected, but with very different results across asset classes.   Flow chart of how monetary policy impacts the economy, according to the ECB Moving on from the channels to the real impact of monetary tightening so far, the impact on bank lending has slowed. Most importantly, the bank lending impact was strong at the start of the tightening cycle - lending growth to non-financial corporates has slowed from around 1% month-on-month in the summer of 2022 to 0% in November and has stabilized around 0% since. This also seems related to a working capital and inventories-related lending surge in summer, the need for which faded when supply chain problems eased. Lending to households slowed from 0.4% month-on-month in May 2022 to 0% in April 2023, since when it has also stabilized around 0%. Overall, the lending correction is not dramatic, but has a significant impact on future investment. Don’t forget that there is likely more to come - the ECB Bank Lending Survey suggests continued weakness in lending ahead. In short, the impact of monetary policy tightening on lending and consequently on the real economy is unfolding like every textbook model would suggest.   At face value, monetary transmission is working quickly   Not every aspect of tightening works quickly, quite some of the burden is still to come While at face value the transmission of monetary policy tightening is working as planned, looking slightly deeper reveals more complexity and more sluggishness. Coming from a long period of negative rates is having a big impact on how fast interest payments are rising. Looking at net interest payments from corporates, we see that these have increased disproportionally slowly so far (chart 4). The same holds for households, where the average mortgage rate paid by households in the eurozone has only increased by 0.8% while new mortgage loan rates are up by 2.7%. For governments, the same is true. Interest rate payments are increasing but remain at relatively low levels. Low locked in-rates have caused a relatively small increase in debt burdens so far.   Average interest payments have started to move up only slowly   This means three things: First of all, costs have not increased materially so far, which would be an additional tightening effect. Higher costs force cuts in spending or investment elsewhere, which results in weaker activity. While the relationship between interest rates for new loans and average debt burden was more synchronized in previous hike cycles, the initial effect on debt burdens has been relatively limited. Secondly, this means that the impact of the hike cycle is likely more spread out this time. Over the course of next year, loans will have to be refinanced at higher rates, which will continue to increase average debt burdens. So, while the initial impact of ECB tightening has already been forceful, it is reasonable to expect that the effect will not fade quickly in 2024 as more businesses, households and governments adjust to a new reality of higher rates. Lastly, since there is now such a discrepancy between the current interest rate and the average interest rate paid in the economy, the ECB could cut rates but average interest payments could still be increasing. So, if the ECB were to start the process of decreasing interest rates, part of the tightening effect would still be coming through the pipeline. This would dampen the effect on monetary easing.   Important moderating effects have kept the impact on GDP mild so far Much to the chagrin of the ECB, governments have continued to provide ample fiscal support to the economy. As chart 6 shows, the fiscal stance is falling moderately, but continues to be generally supportive of economic activity. It is not the first time that fiscal and monetary stances are at odds with each other - think back of the 2010s when fiscal austerity countered ECB efforts to bring inflation up to 2%. Now this is working the other way, as fiscal support boosts economic activity and therefore counters the ECB’s efforts to reduce underlying inflation.   As in the 2010s, monetary and fiscal policy are working in different directions   The labour market is also moderating the impact of tightening; at least for now. The weaker economic environment since late 2022 has not yet translated into a weaker labour market. While a relatively simple Okun’s Law would suggest that the labour market should be cooling slightly, it remains red hot. This supports economic activity and maintains wage pressures for the moment. Tightening efforts in the labour market remain relatively invisible for now. Finally, investment has continued to be supported by the supply-side problems from 2021 and 2022. While new orders have fallen, production has been kept up by the large amount of so far unfulfilled orders brought forward. The size of eurozone order books has fallen rapidly since late 2022, which has boosted activity and masked weakness in drying up orders when it comes to total economic activity. These factors have so far suppressed the impact of tightening on the economy, but we expect them to be less supportive of growth in 2024. While the fiscal stance is set to remain expansionary, with the exception of Germany, it will likely be less so in 2024 than in 2023. The labour market has recently shown more serious signs of weakening, which leads us to expect that unemployment will finally start to slowly increase over the course of next year. Backlogs of work have largely been depleted, meaning that the full effect of monetary tightening will likely be felt more strongly next year as mitigating factors fade.   Unemployment is lower than you would expect on the basis of current economic activity   The landing has been very soft so far, but gets bumpier in 2024 Inflation has come down very quickly over the course of 2023. Peaking at 10.6% YoY in October, it has fallen to 2.4% in November. This has been achieved with economic activity stagnating but not falling and the labour market continuing to go from strength to strength. The monetary stance has moved from an interest rate of -0.5% and QE to a 4% interest rate and QT. Can we really move from a broadly accommodative stance to a very restrictive stance and not notice any economic pain? That seems unlikely: much of the impact of the higher rate environment is likely to be felt next year because of the usual lag of monetary policy, because some effects of tighter policy are now more lagged than in previous cycles, and because mitigating factors are set to fade. Milton Friedman’s famous quote that monetary policy has ‘long and variable lags’ seems to be an understatement in the current complex monetary environment. That does mean that the restrictive impact of monetary policy on the economy is set to increase while inflation already looks to be solidly under control. The month-on-month core inflation rate in November was negative and the trend has been sharply down. Disinflation in 2023 was mainly the result of base effects due to ending supply shocks and not so much to monetary policy tightening. Disinflation in 2024, however, will be mainly the result of the further unfolding of monetary policy tightening. While there are clear uncertainties about the inflation outlook - including how wage growth will develop and whether new spikes in energy prices could emerge - there is a high risk that the ECB is getting behind the curve for the second time in one cycle. It was late in responding to inflation on the way up and could well be late in responding on the way down as well. Expectations of rate cuts have moved forward and have grown a lot recently. Given the wrong assessment of inflation dynamics on their way up and concerns about possibly more persistent inflationary drivers, we think the ECB will be very hesitant to simply reverse the rate hiking cycle. Instead, we expect the ECB to wait for additional wage growth data for the first quarter and then start cutting in June - but rather gradually, with three cuts of 25bp every quarter. That would still leave monetary policy restrictive and keep average interest rate payments going up as society adjusts to higher interest rates. It would also make new investments slightly more attractive again. The hike cycle may have so far seemed like an easy adjustment to swallow, but ironically the pain of tightening will likely be felt most when the ECB already starts to ease.

Romanian growth figures reinforce signs of resilience The release of detailed data for third-quarter GDP growth, alongside a rather hefty upward adjustment of the flash print, points to a pretty resilient growth picture in Romania. We marginally raise our full-year growth forecast from 1.5% to 1.7%, with the risk balance still tilting upwards.   As the initial 0.2% annual growth in the third quarter has now been revised to 1.1%, the overall picture of Romania's economy certainly looks brighter for the full year. The quarterly growth has also been revised from 0.4% to 0.9%. Assuming no further data revisions (a difficult assumption to make), it would now take only a meagre 0.1% quarterly expansion in the fourth quarter to reach our initial 1.5% annual growth forecast. On the supply side, our assumption that agriculture can offer a positive surprise in the third quarter materialised, as the sector added 0.8pp to the 1.1% overall annual expansion. Boosted by the strong momentum in public infrastructure investments, the construction sector added 0.4pp. Industry remains a laggard, subtracting 0.4pp and marking the fifth consecutive quarter of negative contribution to the GDP growth.   Real GDP (YoY%) and contributions (ppt) - supply side   Demand side, there was a rather large negative contribution coming from inventories (included in “others” in the chart below) which subtracted 4.8pp from the 1.1% growth rate. Otherwise, the main engine of the economy right now remains fixed investments, which contributed with 3.7pp – the highest contribution since the third quarter of 2019. Net exports have also contributed positively again by 2.1pp. This is the third consecutive quarter of positive contribution from net exports, a rather unusual situation for the Romanian economy over the last 10 years or so.     Real GDP (YoY%) and contributions (ppt) - demand side   The few pieces of high-frequency data that we got for the fourth quarter so far are pointing towards a robust expansion, with retail sales starting the quarter on a rather strong footing and confidence data marginally improving as well. For 2024, we are likely to see a rebalancing of the growth drivers from investments towards consumption, though the former should still hold on close to double-digit growth. However, with public wages likely to stay well within double-digit growth and pensions due to be increased by 13.8% starting January 2024 and approximately 22.0% starting September 2024, the private consumption story is likely to show marked improvement. The above picture could complicate the National Bank of Romania's decision-making process, as the rising demand could slow the descent of an already sticky inflation profile, with many other uncertainties on the horizon. Again, this increases the likelihood of the rate-cutting cycle starting later and/or being shorter than our current 150bp estimate

Agriculture - Coffee production in Africa declines The latest data from the International Coffee Organization shows that African coffee production in 2022/23 fell by 7.3% YoY to 17.9m bags (60 kg bags), down from 19.3m bags (60 kg bags) for the previous season. The decline was mainly due to low production in Ivory Coast, where output dropped 65% YoY to 600k bags. Along with that, Uganda and Kenya coffee production also declined by 6.7% YoY and 3.9% YoY to 5.6m bags and 730k bags, respectively. The latest trade numbers from Chinese Customs show that China’s soybean imports rose 7.8% YoY to 7.9mt in November, as cheaper supplies from Brazil continued to dominate the import market share. Cumulative imports rose 13.3% YoY to 89.6mt over the first eleven months of the year.

CEE: NBP presser should support PLN The National Bank of Poland left rates unchanged as expected. The statement did not change much either. The MPC wants to know more about the new government's fiscal policy and the impact on inflation before its next steps. So the more interesting story today will be Governor Adam Glapinski's press conference. Our economists see stable rates next year, but the story and risks are not so simple. In addition to the NBP, today we will also see monthly data in the Czech Republic, including industrial production which, like yesterday's retail sales, should confirm the weak economy in the fourth quarter. Also this morning, the second reading of Romania's third-quarter GDP data has already been published. In the markets yesterday, rates were catching up with the fall in core rates from the previous days across the CEE region, which somewhat undermines the FX picture in general. This is most visible in the PLN and CZK market. In Poland, however, the hawkish NBP should help the currency today. Thus, we may see a weaker zloty this morning but by the end of the day, we should be back to 4.320 EUR/PLN or lower. On the other hand, in the Czech Republic, the CZK remains without the support of the central bank and rates are pointing more towards the 24.40 EUR/CZK levels where we were a few days ago. Moreover, weaker data may support this move higher. fter the Polish zloty, the Mexican peso has delivered some of the largest total returns over the last month (alongside the Turkish lira!). As we discuss in our 2024 FX outlook, we think the Mexican peso can hold firm - even in the face of rate cuts. On that front, Mexico today releases inflation data for November - where core CPI is expected to drop to a new cycle low of 5.3% YoY. The market is slowly coming round to the view that Banxico could cut rates in the first quarter - perhaps at the March meeting. Pricing of a Banxico easing cycle looks a little conservative and we think MXN rates could soften if next week's Banxico policy meeting sheds more light on an easing cycle - especially if anyone were to vote for a cut.  We think MXN gains will be more of a total return story in 2024 - i.e. attractive interest rates but spot USD/MXN not going too much below 17.00. Indeed, Banxico might well be thinking the peso is a little too strong on a real exchange rate basis. But strong fiscal support should see Mexican growth hold up next year. Another reason we think the peso should continue to outperform.    

EUR: Pushback from the hawks? One of the hottest stories right now is that traders are pricing in, for next year, more rate cuts from the European Central Bank than the Federal Reserve. And traders are pricing in twice the rate cuts for the ECB than the Bank of England next year. We think that the pricing of the ECB cycle is far too aggressive and our forecast is for 75bp of cuts starting in June - rather than the 125bp cuts starting in March/April. We hear from ECB arch-hawk Robert Holzman this morning. Let's see whether he can move markets. Given that extreme pricing of the ECB curve, it may then be that EUR/USD does not need to fall too much further. 1.07 is currently our year-end forecast - largely because our team felt US data could hold up in the fourth quarter. But let's see what tomorrow's US jobs report and next week's Fed and ECB meetings have to say on the matter. We see EUR/USD holding support at 1.0730 today.

FX Daily: Yen back in the spotlight Ahead of tomorrow's US jobs data release, the short-term highlight in the FX market is the continued outperformance of the yen. This has nothing to do with a risk-averse environment (asset markets are bid) and everything to do with the Bank of Japan potentially ending its negative interest rate policy. It looks like the yen can hold its gains near term.   USD: Mixed environment, yen strength stands out FX markets remain relatively calm. One anomaly is that global risk assets (both bonds and equities) are doing quite well, but the dollar is staying quite bid. Normally one might expect the dollar to be easing gently lower in an environment like this. One explanation for this is that while interest rates are falling around the world (risk positive) they are actually falling faster overseas (especially in Europe) than in the US. Notably, EUR versus USD swap differentials are at the widest of the year and exposing the soft underbelly of EUR/USD. But the short-term highlight is the outperformance of the yen. The focus here, once again, is whether the Bank of Japan (BoJ) plans to end eight years of negative interest rates when it meets on 18/19 December. The FX market has been here many times before with this story - only to be rudely disabused of its speculation every time. However, at ING we have pencilled in a BoJ rate hike in the second quarter of next year. Our suspicion is that speculation of a BoJ move at the 18 December meeting is premature since there is no accompanying Outlook Report - a report that could show CPI sustainably hitting 2% and justifying an end to negative rate policy. That said, USD/JPY could still drift to the 144.50/145.00 area over the next week as speculation continues to build about a December BoJ move. The underlying dollar story, however, will be determined, by tomorrow's US jobs report and next week's FOMC meeting. It looks like the US bond market is already pricing in a soft number - which warns perhaps of a firmer dollar if the data is not too weak. Yet we suspect that investors are in the mood to put money to work - noting a major pro-risk turning in the inflation and interest rate cycle - such that the dollar gets sold into any rally tomorrow.  For today, we doubt jobless claims will be a big driver of price action today. We will be interested to look at the October US consumer credit data after the close today to see whether record-high credit card interest rates are finally taking their toll on the US consumer.  DXY has been performing better this week, but we see a scenario where it stalls in the 104.25/50 area.    

Weak German industrial production marks end of another disappointing week Another disappointing macro week suggests that the German economy is on track for another quarter of contraction. After a drop in exports and a sharp fall in new orders, it is now the turn of industrial production to disappoint, signalling a very weak start to the fourth quarter. In October, industrial production fell by 0.4% month-on-month, from -1.3% in September, the fifth consecutive monthly drop. On the year, industrial production was down by 3.5%. Industrial production in energy-intensive sectors dropped by 1.4% MoM and is down by more than 7% on the year. Even worse, production in the construction sector decreased by more than 2% MoM. To make a disappointing report even worse, industrial production is some 7% below its pre-Covid level, almost four years since the start of the pandemic. Fiscal woes add to recession risks This week’s data confirms that it will not be easy for the German economy to gain fresh growth momentum. Even if the worst of the weakening in sentiment seems to be behind us, the hard economic reality does not look pretty. In fact, the economy seems to be on track for another quarter of contraction. And the list of dampening factors for the German economy is long; be it the still-unfolding impact of the European Central Bank's monetary policy tightening, the potential slowing of the US economy or new uncertainty regarding already-announced fiscal stimulus measures and potential new austerity measures. Only a turn in the inventory cycle could bring some relief in early 2024, although this turn has not happened yet. In the meantime, the fiscal woes continue. In yesterday’s regular weekly government meeting, the coalition could not agree on a budget for next year. Time is running out and the government needs to find a solution to what currently looks like a €17bn hole in the 2024 budget. The problem is clear, the solution isn’t. Either the government declares an emergency situation for the fifth year in a row to get a deviation from the constitutional debt brake or it will have to agree on expenditure cuts and/or tax increases. So far, the liberal FDP has opposed declaring another emergency for 2024, fearing further deterioration of support from its own party members as well as voters. For the Greens and the SPD, expenditure cuts for flagship projects like the green transition and social benefits also look like a no-go. It currently looks unclear as to how the coalition wants to square the circle. Deviating from the debt brake would be the least harmful for the economy. Austerity measures would clearly push the economy further into recession, leaving aside that it would lead to an unprecedented fiscal policy stance across the eurozone - austerity in a low-debt country and rather loose fiscal policies in high-debt countries. In any case, recent fiscal woes have clearly damaged the credibility and reliability of policy announcements and at least in the short term, will lead to more investment and consumption being held back. All in all, we expect the current state of stagnation and shallow recession to continue. In fact, the risk that 2024 will be another year of recession has clearly increased. It would be the first time since the early 2000s that Germany has gone through a two-year recession, even though it could prove to be a shallow one.

Rates Spark: Science fiction? The 10Y UST yield is closing in on the 4% mark as if a weak jobs report tomorrow was a given. But underlying is also a further slide of inflation expectations. The front end is lagging, however, and being already priced aggressively for cuts, it will probably need these to become more imminent to rally further.   Rates continue to decline but the front end is lagging Market yields continued to drop with the 10y UST sinking to 4.11% and 10Y Bund to 2.2% yesterday. The driver was a weaker ADP private payrolls report, though some will point out that the correlation with the official payrolls data that is due tomorrow is actually negative. Possibly more relevant for the broader picture was the 5.2% figure for third-quarter productivity growth. It facilitated a 1.2% fall in unit labour costs, which is a positive impulse for a Fed still showing concern on inflation. Another supporting factor was a further decline in oil prices, which saw WTI fall below US$70/bbl. This picture of a reassessment of inflation as a driver does gel with a further slide in inflation swaps, in the US by more than 7bp in 2Y and close to 5bp in 10Y. In EUR the drop today was less pronounced, but the overall drop of the 2y for instance from a range around 2.65% over the summer months to now 1.8% speaks volumes. It is notable in yesterday's session that the already aggressive rate cut discount is struggling to deepen further meaning that curves are inverting more as rates decline. The US saw 2Y UST yields even rising somewhat to 4.6%. Front end EUR rates also moved marginally higher. There was some pushback from the European Central Bank’s Kazimir who called expectations of a March rate cut “science fiction”. And a little earlier, the ECB’s Kazaks, who doesn’t see the need for cuts in the first half of next year, did acknowledge that if the situation changes, so might decisions. This is what Executive Board member Schnabel had hinted at as well earlier this week. At the moment the ECB is probably just as smart as the market as it will have to rely on the data. The ECB is right to signal caution and highlight lingering risks, but trying to micro manage now may only add to market volatility.   Inflation expectations have been sliding over recent weeks   Today's events and market view The 10yr UST yield came close to 4.10% and knocking on the door of the big figure 4% yesterday, before being nudged higher overnight by a weaker 10Y Japanes government bond auction. Still, the market continues to be expecting Friday's payrolls report to be weak – the softer ADP pointed in the right direction, but markets appear to be overlooking its poor forecasting track record this time around.   There are more US job market indicators to digest today with initial and continuing jobless claims as well as the Challenger job cut numbers. The former may be subject to seasonal volatility around the Thanksgiving holiday season. In Europe we will be looking at final third-quarter GDP data as well as scheduled appearances by the ECB’s Holzmann and Elderson. In government bond primary markets the focus is on the final French and Spanish bond auction for the year. Note that in the US we are still looking at upcoming 3Y, 10Y and 30Y bond sales next week.

Too dovish Falling energy prices help softening global inflation expectations and keep the central bank doves in charge of the market, along with sufficiently soft economic data that points at the end of the global monetary policy campaign. This week, the Reserve Bank of Australia (RBA) and the Bank of Canada (BoC) kept rates unchanged – although the RBA said that they could hike again if home-grown inflation doesn't slow. But overall, the Federal Reserve (Fed) is expected to cut as soon as in May next year, and the European Central Bank (ECB) is expected to announce six 25 basis point cuts next year. If that's the case, the ECB should start cutting before the Fed, sometime in Q1. It sounds overstretched to me.   Data released earlier this week showed that French industrial production fell unexpectedly for the 3rd straight month in October, Spanish output declined, and German factory orders fell 3.7% in October versus a 0.2% increase penciled in by analysts. The slowing European economies and falling inflation help building a case in favour of an ECB rate cut, but I don't see the ECB cutting rates anytime in the H1. Remember, economic slowdown is the natural response that the ECB was looking for to slow inflation. Now that it happens, the bank won't leave the battlefield before making sure that inflation shows no sign of life. But the EURUSD is understandable extending its losses within the bearish consolidation zone, as the German 10-year yield sinks below the 2.20% level. The EURUSD is now testing the 100-DMA to the downside. Trend and momentum indicators are comfortably bearish and the RSI hints that we are not yet dealing with oversold market conditions. Therefore, the selloff could deepen toward the 1.07/1.730 region.  The direction of the EURUSD is of course also dependent on what the USD leg of the pair will do. We see the dollar index recover this week despite the falling yields driven lower by a soft set of US jobs data released so far this week. The JOLTS data showed a significant fall in job openings in October, while yesterday's ADP print revealed around 100K new private job additions last month, much less than 130K penciled in by analysts. There is no apparent correlation between this data and Friday's official NFP read, but the fact that independent data point at further loosening in the US jobs market comforts the Fed doves in the idea that, yes, the US jobs market is finally giving in. On the yields front, the US 2-year yield remains steady near 4.60%/4.65% region, while the 10-year yield fell to 4.10% yesterday, from above 5% by end of October. This is a big, big decline, and it means that investors are now ramping up the US slowdown bets. That's also why we don't see the US stocks react to the further fall in yields. The S&P500 and Nasdaq both fell yesterday, while their European peers extended gains regardless of the overbought conditions. The Stoxx 600 closed yesterday's session above the 470 level. The softening ECB expectations are certainly the major driver of the European stocks toward the ytd highs; German stocks hit an ATH yesterday despite the undoubtedly morose economic outlook. Actual levels scream correction.      

Scream correction.  By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   US crude plummeted 4% yesterday and sank below the $70pb mark and Brent slipped below $75pb. Momentum traders and falling volumes worsened crude's recent plunge while OPEC's latest announcement of output cuts and Saudi's additional threats that they will extend their solo cut beyond Q1 went totally unheard. Worse, as the bears saw that investors ignored the supply cuts and threats, they feel more confident to increase their bets against crude. And indeed, the cartel's shrinking share of global output and frictions among members regarding the supply cut strategy mean that either the supply cuts don't make much difference, or further action will be difficult and perhaps too costly. Add the global slowdown woes into that mix, the dwindling falling interest and algorithmic trades' lack of emotion regarding the OPEC news, you understand why the barrel of crude is below $70pb and not above $100pb this December, as many banks had forecasted at the start of the year. And if a more than 4.5mio barrel fall in the US oil reserves last week couldn't halt yesterday's oil selloff, it is because the most recent number was blurred by a big margin error, the biggest on record – or the bulls just couldn't find the energy to swim against such a strong tide.   The question on the back of everyone's mind is: could crude oil extend losses? At the current levels, crude oil is trading near oversold market territory, therefore your algorithmic models based on market metrics should take than into account and slow selling. As such, we shall see a certain rebound at the current levels. Yet any price recovery could remain limited at $75/78 range, including the minor 23.6% Fibonacci retracement and the 200-DMA, and once the time is right, we could see this negative move extent to $65/67 region.   Remains the question of US strategic reserves that the US is said to consider refilling between $67/72 region. Yes, that will certainly help slow the downside pressure at this range but keep in mind that these  buybacks are limited to about 3 mio barrels per month due to physical constraints and won't reverse the tide.   Now that OPEC risk is out of the way, the biggest upside risk for oil is Middle East tensions.     

China trade disappoints, as Moody's downgrade weighs on Asia markets By Michael Hewson (Chief Market Analyst at CMC Markets UK)   European markets saw another positive day yesterday, with the DAX posting another record high, while the FTSE100 broke 2 days of declines to close higher as well.   The outperformance on European markets appears to be being driven by the increasing belief that the European Central Bank may well be forced into cutting rates sharply in the early part of 2024 in response to sharply slowing inflation and a sclerotic economy.   The last few days has seen a sharp decline in bond yields reflecting an increasing belief on the part of investors that rather than higher for longer, central banks will start cutting rates as soon as Q2 next year. The shift in tone has been most notable from several ECB policymakers who have indicated that rate hikes are done.   US markets also appear to have started to run out of steam after their big November rally, as traders take stock of how resilient the US economy is.   Asia markets on the other hand have struggled with the latest set of Chinese trade numbers pointing to an economy that is still struggling, and a downgrade by Moody's on China's credit outlook, along with downgrades to banks, and other small companies which looks set to weigh in the European open this morning, in the wake of weakness in Asia markets.   In October Chinese import data broke a run of 10 consecutive negative months by rising 3% in a sign that perhaps domestic demand is returning, beating forecasts of a 5% decline.   Slightly more worrying was a bigger than expected decline in exports which fell -6.4%, the 6th month in a row they've been lower, and a worrying portend that global demand remains weak, and unlikely to pick up soon. Today's November numbers have seen imports decline by -0.6%, against an expectation of a rise to 3.9% in a sign that domestic demand is still very weak, while exports improved, rising by 0.5% a solid pick up from the -6.4% decline in October.   Yesterday's US ADP payrolls report saw jobs growth in November slow to 103k, in a further sign that the labour market is slowing, with the last 3 months showing significant evidence that hiring is slowing. This trend was also reflected in this week's fall in October job openings to 8.7m the lowest level since March 2021.   For the time being weekly jobless claims have shown little signs of increasing, trending in the low 210k for the last couple of months.   Continuing claims on the other hand have been edging higher rising to a 2-year high last week 1.93m. Today's claims numbers are expected to come in at 220k, with continuing claims set to also remain steady, ahead of tomorrow's eagerly anticipated non-farm payrolls report.   EUR/USD – continues to slip lower raising the prospect of a move towards the 50-day SMA just below the 1.0700 area. Resistance now at the 1.0825 and 200-day SMA, while above that at the 1.0940 area.   GBP/USD – remains under pressure as it continues to slip away from the 1.2720/30 area. A break below 1.2570 signals a deeper pullback towards the 1.2460 area and 200-day SMA. A move through the 1.2740 area signals a move towards 1.2820.    EUR/GBP – while below the 0.8615/20 area, the risk remains for a move towards the September lows at 0.8520, and potentially further towards the August lows at 0.8490.   USD/JPY – currently trying to rally off the recent lows at the 146.20 area, with resistance now at the 148.10 area. Looks vulnerable to further losses while below this cloud resistance with the next support at the 144.50 area.   FTSE100 is expected to open 29 points lower at 7,486   DAX is expected to open 52 points lower at 16,604   CAC40 is expected to open 24 points lower at 7,412

No change in Polish rates and stronger PLN may be a game-changer Poland's central bank keeps rates on hold and reiterates its uncertainty about the fiscal outlook and regulated prices that may impact future inflation. The MPC welcomed recent PLN appreciation as it facilitates disinflation and is more aligned with economic fundamentals. Policymakers will remain in a 'wait and see' mode until at least March 2024. The Monetary Policy Council's decision to maintain interest rates (the policy rate at 5.75%) comes as no surprise. We await tomorrow's conference by the NBP chairman,  Adam Glapiński. On the one hand, recent communication points to the end of the easing cycle, but on the other, the main central banks are about to start monetary easing (Fed, ECB, CNB). In addition, the external inflation picture is improving strongly, and the consensus is shifting towards an earlier return of CPI to target in the euro area and the US or even earlier cuts by the Fed and the European Central Bank. Minor amendment of the post-meeting press release In the official written communiqué, the Council assessed that recent appreciation is conducive to lowering inflation and is consistent with economic fundamentals. For many months, the MPC had expressed a wish that such a move in the PLN exchange rate would occur. This suggests that, in the NBP's view, further appreciation of the zloty is no longer welcomed and would not be beneficial to the Polish economy. Policymakers also noted a further fall in core inflation in November and PPI deflation, which, in the Council's view, confirms the extinction of most external supply shocks. The MPC also mentioned a gradual economic recovery. MPC communication and decisions in the coming months We wonder which way the MPC's communication will go in the coming months. There is a great deal of uncertainty about whether it will be even more hawkish or, following other banks, neutral or perhaps dovish. Factors that will shape the policy decisions in the coming months mentioned in the press release include the scale of fiscal expansion, the scale and timing of regulated price adjustments and their impact on inflation. Policymakers repeated that future decisions will depend on incoming macroeconomic data. Rates to remain unchanged in 2024, but new risk factors emerged In our view, the MPC is likely to refrain from changing the main parameters of monetary policy in 2024, awaiting important administrative decisions for the inflation profile (regulated energy prices, shield measures, VAT on food) and information on the scale of fiscal expansion in 2024. The MPC is likely to make its first serious consideration regarding the level of rates in March on the occasion of the next inflation projection, which should take into account the aforementioned factors. If our inflation scenario materialises (i.e. in the short term, inflation may surprise on the lower side, especially the core inflation rate, but in the longer term it will still remain above the target), there will be no room for NBP rate cuts at least until the end of 2024. In our view, the picture of the Polish inflation outlook may change with further PLN firming. We see risks of a stronger zloty and an earlier return of CPI to target, suggesting earlier cuts than we currently assume. At the same time, large inflows of EU funds, foreign direct investment and fiscal expansion are arguments against rate cuts as they may boost economic activity; the balance of risks points to an earlier cut than we assume.

Bank of Canada retains its hawkish bias The BoC kept rates unchanged as expected, but had to recognise that rates are “clearly restraining spending” and that disinflation is happening at a faster pace. However, that was not enough to drop the threat of another hike if necessary. While this is generally good news for CAD, external factors (US data in particular) remain much more relevant.   Sticking to the tightening threat The Bank of Canada kept rates unchanged at 5.0% today, as widely expected. The policy statement noted that “higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year”. Incidentally, the BoC recognised the faster pace on the disinflation front, dropping the reference to “slow” progress on inflation. Those considerations would have likely led to a more dovish tone on the policy outlook as a consequence, but the BoC decided to reiterate the threat of more monetary policy tightening instead: “Governing Council is still concerned about risks to the outlook for inflation and remains prepared to raise the policy rate further if needed”. The concerns about the inflation outlook come not only from potential external shocks (e.g. energy prices), but also from a resiliently tight domestic labour market, as confirmed by last week’s strong jobs figures. We are still convinced that the BoC will not tighten policy further given the deterioration of the economic outlook and our expectations for a steady decline in Canadian’s inflation. However, there is a likely intent to fight the ongoing dovish repricing of rate expectations in Canada, and that means the BoC out-of-meeting commentary may be careful to send dovish messages to the market before the January meeting, when new economic projections will be released.   CAD still too reliant on US data From a market perspective, the reiteration of the hawkish bias by the Bank of Canada is positive news for CAD, although the acknowledgement of faster inflation decline and the strong impact of tight monetary conditions on the economy have offset the impact on the loonie, which is holding steady after the announcement. Despite the BoC’s reluctance to pivot to a more dovish stance, the loonie remains highly affected from a deterioration in US data, to which it has the highest correlation in G10. In the short term, the last bits of evidence of US activity resilience may support CAD – especially in the crosses – but we expect the worsening of US (as well as Canadian) growth sentiment next year to make CAD less appealing than other risk-sensitive currencies like the antipodeans and Scandies.

CEE: NBP to confirm hawkish turn This morning, the monthly data set was released in the region. We had retail sales data in Romania and retail sales and industrial production in Hungary, all for October. Here we highlight the industrial sector, which fell by 2.8% YoY, below market expectations. Later this morning, we'll see retail sales in the Czech Republic, which should confirm a weak economy in the fourth quarter as well. Later today, we will see a decision from the National Bank of Poland (NBP). We expect rates to remain unchanged, as in November. So, the main event here will be the governor's press conference tomorrow. But today, we'll still see a statement that should confirm the central bank's hawkish turn last month. The Polish zloty is slowly but steadily moving towards stronger levels, and we think that the current market conditions justify the level of 4.320 EUR/PLN. However, PLN rates have followed the fall in core rates, which in our view gives more opportunity for rates to react to the hawkish tone of the central bank – and we should see some upward repricing over the next two days especially at the short end of the IRS curve. This should support PLN and we should see more gains and move towards 4.300 EUR/PLN by the end of the week.

CAD: BoC may prefer a hawkish hold today The Bank of Canada announces monetary policy today, and there is a strong consensus that rates will be kept unchanged. The big question from a market perspective is to what extent the BoC will acknowledge the deterioration in the economic outlook and scale back its threat of another rate hike. As discussed in our BoC preview, the recent commentary has turned more dovish, and third-quarter growth figures were very weak. That said, last week's jobs figures in Canada came in on the strong side, likely keeping fears of a passthrough of a still-tight labour market to inflation alive at the BoC. We think jobs data and the desire to push back against rate cuts will convince the BoC to retain a hawkish bias today. Considering the market is pricing around 100bp of easing next year in Canada, there is some room for a hawkish review of expectations and some support for the loonie. That said, CAD’s strong correlation with US data means that external factors will remain the key driver.

EUR: Not easy to pick a bottom Shorting the euro appears to be one of the most popular bets in FX at the moment. Comments by hawkish hardliners like Isabel Schnabel yesterday – who suggested that another hike is now off the table and essentially moved the discussion to rate cuts – have added further pressure on the euro. We continue to point to how the current downward correction in EUR/USD is not out of line with short-term rate differentials; when taking the two-year swap rate gap (-130bp) as a driver, a further leg lower to the 1.06 area would not be an aberration. That makes us reluctant to call for the bottom in EUR/USD just yet, and even more so in EUR-crosses, especially against the likes of AUD and NZD. A catalyst for an idiosyncratic euro rebound is not in sight, at least for today, when there are no scheduled European Central Bank speakers and the eurozone’s data calendar only includes the October retail sales – hardly ever a market mover in the region. The big slump (7.3% YoY) in Germany’s factory orders for October (data released this morning) is likely to keep the negative euro narrative alive at the start of the European session. EUR/USD is now trading very close to the 1.0770 100-day MA support, and a break lower can further fuel the bearish momentum. A test of 1.0700 before the weekend is entirely possible if the dollar remains bid.

FX Daily: Hard to buck the euro downtrend The dollar has shown resilience after disappointing JOLTS job openings data yesterday, leaving EUR/USD under pressure as the euro’s idiosyncratic negatives fuel bearish momentum. Today, the Bank of Canada may deliver a hawkish hold despite worsening growth, giving some help to the Canadian dollar.   USD: Showing resilience The larger-than-expected drop in October’s JOLTS job openings has offered new reasons to speculate on more rate cuts from the Federal Reserve next year, but the stronger ISM services figures in November have worked as an offsetting factor in terms of FX impact. AUD and NZD are rallying this morning, helped by stronger fixing for the yuan from the People's Bank of China (PBoC) after yesterday’s downgrade of China’s outlook by Moody’s. However, the dollar has remained rather supported across the board even after the disappointing JOLTS figures, a signal that markets are taking a less aggressive stance in FX following non-conclusive evidence of deterioration in the US outlook.   Speaking of non-conclusive evidence, it’s worth noting that the ADP payrolls being released today have no predictive power for actual payrolls. Still, markets have often moved on out-of-consensus ADP numbers. Today, expectations are 130k. MBA mortgage applications, final third-quarter labour cost data, and October trade balance figures are also on the calendar today but should not move the market. We suspect markets are holding a more cautious stance as we head into the key US payroll figures on Friday and the Fed meeting next week, where there is a good probability the FOMC will deliver a protest against rate cut bets – especially if data fails to turn lower. When adding the soft idiosyncratic momentum faced by the euro, we remain modestly bullish on the dollar into the FOMC.

Rates Spark: Pressure at the extremities The fair value number for the US 10yr yield is 4%, but we really need to see Friday's payrolls number first. The bond market is screaming at us that it'll be weak. But unless validated, the rally seen of late is vulnerable. Also be aware of front end pressure, although this was calmer yesterday.   Resumed inversion points to overshoot risk in the 10yr yield An interesting aspect of the price action in the past couple of days has been the resumed inversion of the US curve. The front end is participating in the falling yields trend, but the 10yr benchmark is leading it. That can reflect an overshoot tendency in the 10yr. It is true that the JOLTS data showed a surprise drop in job openings, but that should have been just as capable of sparking a larger front end move, helping to dis-invert the curve. At the same time, such price action is consistent with a 2yr yield that does not yet see a rate cut as a front and centre event. Typically, the 2yr really gaps lower about three months before an actual cut. But in the meantime, it should be capable of keeping better pace with the falls in yield being seen in the 10yr. While we are of the opinion that 4% is the structural fair value number for the 10yr (on the assumption that the funds rate targets 3% as the next low), we also feel that this market needs a weak payrolls number on Friday to validate the move seen in the 10yr yield from 5% all to way down to sub-4.2% in a matter of weeks. The fact remains that we have not seen either a labour market recession or a sub-trend jobs growth experience. At least not yet. The market is trading as if the 190k consensus expectation is wrong for Friday and that we’re going to get something considerably weaker. The JOLTS data supports this – as does the latest Fed Beige book. But we do need to see that report before we could even consider hitting 4% on the 10yr.   Repo pressures ease, but still some cross-winds to monitor on money markets At the other extreme of the curve, the elevation in repo rates seen at the end of November that had extended into Monday of this week had begun to ease back through Tuesday. The issue here is ultra front end market rates had come under upward pressure. Extra bills issuance has been a factor, as this has both taken liquidity from the system and placed upward pressure on bills rates generally. Repo is a function of the relatives between available collateral and available liquidity and at month-end, liquidity was tied up, and that pressured repo higher. The resumed build in volumes going back to the Fed on the reverse repo facility on Tuesday proves a reversion towards more normal conditions. That said, SOFR remains elevated, and that will contribute to balances falling in the Fed’s reverse repo facility as we progress through the coming weeks. If the market is showing a better rate than the 5.3% overnight at the Fed, that should take cash from the reverse repo facility. Interestingly there was a surprise jump in usage of the standing repo facility. Not large, but it shows that in some quarters there is at least some demand for liquidity. A bit early for this to become the dominant issue, but worth monitoring all the same.   Today's events and market view The JOLTS data highlighted the markets' sensitivity to any indications of a cooling US labour market. Ahead of Friday's payrolls report, markets will eye the ADP estimate. Given its poor track record of forecasting the official data, it is likely to take a larger surprise to move valuations – the consensus is looking for a 130k reading today after 113k last month. Other data and events to watch are the US trade data and, up north, the rate decision by the Bank of Canada. On this side of the Atlantic, we will get eurozone retail sales and, in the UK, the Bank of England financial stability report. In government bond primary markets, Italy is conducting an exchange auction. The UK sells £3bn in 10Y green gilts. The main focus over the coming days and weeks will be on governments’ announcements regarding their issuance plans for next year.

The EURUSD slips into bearish consolidation zone ECB's Isabel Schnabel, who has been one of the most hawkish voices during the bank's latest monetary policy tightening campaign, started to sound dovish this week. Schnabel said that inflation is slowing at a 'remarkable' pace. The 10-year bund yield melted to 2.23% level – last seen back in June.   Yes, but Schnabel also said that officials 'have been surprised many times in both directions'. But traders are now set to sell the euro on dovish ECB expectations until inflation proves the contrary. The EURUSD slipped below 1.08 and to the 100-DMA, where it found some support. Following yesterday's selloff below the major 38.2% Fibonacci retracement, the pair is now in the bearish consolidation zone, with a strengthening bearish momentum that hints that the selloff could continue to 1.07/1.0730. Note that the market could absorb a further selloff at the current levels as the RSI is now at a mid-range: we are far from oversold conditions.   Gold sees support near the $2000 per ounce as falling US yields and fading appetite for equities continue to push capital into the precious metal.  Crude oil remains sold in a lower-highs-lower-lows pattern that paves the way for a further fall to the $70pb target, and China is not happy because Moody's cut its outlook for the Chinese sovereign bonds to negative warning that the country's usage of fiscal stimulus to support local governments and its spiraling property downturn pose risks to its economy. The Chinese CSI 300 fell to the lowest levels in almost 5 years, and nothing helps to undo the damage that government crackdowns and the COVID-zero policy have inflicted on investor confidence. China's stimulus measures brought Moody's to cut its sovereign debt outlook but couldn't bring investors or homebuyers back to the market. 

Asia Morning Bites Australian 3Q23 GDP comes in soft; Moody's negative China outlook will likely dominate risk sentiment today. Taiwan CPI out later.   Global macro and markets Global markets:  US Treasury markets continued to rally on Tuesday, helped by declines in Eurozone bond yields as one of the ECB’s more hawkish board members (Isabel Schnabel) noted that further hikes were “unlikely”. US yields were then given an additional downward push by some soft JOLTS job opening figures. 2Y Treasury yields fell 5.9bp to 4.577%, while 10Y yields fell 8.8bp to 4.165%. The slightly bigger falls in Eurozone bond yields helped EURUSD to decline to 1.0793 and that has also led AUD to decline to 0.6553, Cable to drop to 1.2593, while the JPY stayed fairly steady at 147.18. As the EURUSD move has more to do with EUR weakness than USD strength, these G-10 moves look unnecessary, and a case could probably be made for these other currencies to appreciate against both the EUR and USD, especially those where rate cuts are not on the agenda (JPY) or will be later and probably less than in the US (AUD). The KRW also weakened on Tuesday, rising back to 1311.20. The IDR was also softer at 15505, as were most of the other Asian FX pairs. There may be a bit of further weakness today, though for the same arguments as for the G-10, the rationale for this is quite weak, and we wouldn’t be totally surprised to see this go the other way. Equities didn’t know which way to turn yesterday, given the weak labour demand figures but the lower bond yields, and the S&P 500 ended the day virtually unchanged. The NASDAQ made a small gain of 0.31%. Chinese stocks were battered by the outlook shift to negative from Moody’s, which pointed to the rising debt levels and higher deficits China is adopting to try to underpin the property sector. Though the decision on Evergrande’s winding up was postponed until January, which could have provided some relief. The Hang Seng fell 1.91% and the CSI 300 fell 1.90%.   G-7 macro:  As mentioned, the JOLTS job openings data showed a large decrease in vacancies, to 8733K in October (for which we already have non-farm payroll data) from 9553K in September. The service sector ISM index was actually a little stronger than in October, rising to 52.7 from 51.8, and the employment subindex rose to 50.7 from 50.2, though this has little correlation with month-on-month directional payrolls trends. After a rare “hit” with its weak reading last month, attention may revert back to the ADP employment data later today.  A 130K  increase is the latest consensus estimate. The consensus for Friday’s non-farm payrolls is higher at 187K, with an unchanged unemployment rate of 3.9%. Outside the US, German factory orders and Eurozone retail sales are the main releases, along with a Bank of Canada rate decision (no change expected to the 5% policy rate).   Australia: 2Q23 GDP slowed from a 0.4%QoQ pace in 2Q23 to only 0.2% in 3Q23, weaker than the 0.5% consensus estimate (ING f 0.3%). A more negative contribution to GDP from net exports in data revealed yesterday was the main clue that the figure was going to undershoot. Yesterday’s RBA no change statement showed no additional sign that the RBA is done hiking rates and merely repeated the previous language. Today’s GDP data slightly increases the probability that rates have peaked – however.   Taiwan:  November CPI inflation should show a further moderation, dropping to 2.80% from 3.05% in October. We don’t see this having any impact on the central bank’s policy rates for the time being though.   What to look out for: Australia GDP and US jobs numbers Australia GDP (6 December) Taiwan CPI inflation (6 December) US ADP employment and trade balance (6 December) Australia trade (7 December) China trade (7 December) Thailand CPI inflation (7 December) US initial jobless claims (7 December) Japan GDP (8 December) India RBI meeting (8 December) Taiwan trade (8 December) US NFP (8 December)

Australia: 3Q23 GDP growth softens Weaker GDP growth doesn't guarantee that the Reserve Bank of Australia (RBA) has now finished hiking rates, but it helps.   Clue to the weakness came in trade data One clue that today's 3Q23 GDP growth figure was not going to match the optimistic 0.5% consensus expectation was from the contributions to GDP from net exports data released yesterday. That showed a 0.6pp drag on growth, more than the 0.2pp drag expected, and removing most of the 0.8pp boost from the previous quarter. Inventories also dragged down the GDP growth rate. Household consumption has slowed again and made no change over the previous quarter. Household consumption has been slowing continuously since 2Q22, and shows the impact of the RBA's rate increases so far. Encouragingly for them, it appears to be working.  But non-dwelling construction spending rebounded strongly following the weak 2Q23 figure (-1.8%) and grew by 3.3% QoQ. Dwelling construction grew only 0.2% QoQ, with most of that coming from alterations, while new construction slowed by 0.3%.  Government spending was also strong. General government consumption rose 1.1%, with a strong gain in defence spending (4.7%) helping to push up the total.    Markets shrug off numbers Despite the weakness of the GDP release, markets largely shrugged off the news. AUDUSD, which weakened yesterday in sympathy with the EUR, actually picked up slightly following the figures.  2Y government bond yields, which opened lower after declines in US Treasuries and Eurozone bond yields overnight, also showed little inclination to respond to this data, and neither did longer maturity bond yields.  Yesterday, the RBA left the language of its statement largely unchanged from the previous meeting as it left the cash rate unchanged at 4.35%, offering no fresh clues as to whether their rate hiking cycle has ended or not. Today's data don't close the book on further rate hikes, but they do make it harder for the RBA to justify further hikes without some stronger accompanying evidence that the inflation battle is stalling. 

Continued improvement in Turkey’s underlying inflation trend Annual inflation has remained at 61-62% for a third consecutive month with a better-than-expected monthly November figure. The underlying trend continues to improve. With another better-than-expected monthly reading at 3.3% (vs the consensus at 3.9% and our call at 3.8%), annual inflation in Turkey recorded a slight increase to 62% from 61.4% a month ago. The data reflect elevated upward pressures in services and the impact of natural gas prices. October PPI, on the other hand, stood at 2.8% MoM, translating into 42.2% YoY. The decline in annual PPI from close to triple digits at the end of last year shows improvement in cost pressures despite a Year-on-Year increase in the Turkish Lira equivalent of import prices lately due to commodity price developments and exchange rate increases. Core inflation (CPI-C) came in at 1.96% MoM, inching up to 69.9% on an annual basis on the back of pricing behaviour, exchange rate developments, adjustments in administered prices and inertia in services. However, the underlying trend (as measured by 3m-ma, annualised percentage change, based on seasonally adjusted series), which dropped in October, maintained its recovery in November with a continued decline in not only the core but also the headline rate of goods and services inflation.   Inflation outlook (%)   In the breakdown, all main expenditure groups, with the exception of clothing, positively affected the headline: Among them, housing turned out to be the major contributor with 1.44ppt due to natural prices as households exceeded the free natural gas usage limit. Accordingly, energy inflation jumped to 21.2% from 11.6% a month ago. This was followed by food with 0.74ppt, though annual group inflation moderated to 67.2% (vs the CBT assumption at 66.7% in the latest inflation report release) on the back of both processed and unprocessed food. However, price pressures in processed food were still high, with the second-largest November increase in the current inflation series. 33ppt contribution, on the other hand, was attributable to alcoholic beverages and tobacco with adjustments in cigarette prices. On the flip side, clothing recorded a slight price decline on the back of seasonality. As a result, goods inflation moved slightly up to 52.1% YoY, while core goods inflation receded to 52.2% YoY. Annual inflation in services, which is significantly influenced by domestic demand and wage hikes, maintained its uptrend and reached another peak at 89.7% YoY, attributable to the continuing rise in rents, transportation and telecommunication services.   Annual inflation in expenditure groups   Overall, annual inflation has remained in the 61-62% range for the last three months as pass-through from the post-election adjustment in FX, wages and taxes is reflected in the prices. The monthly trend of inflation may continue to improve if:  currency stability is maintained, adjustments in wages and administered prices prioritize inflation concerns, the impact of geopolitical issues on oil prices remains under control  domestic demand sustains its moderation path. We expect inflation to remain elevated until mid-2024, with further increases above 70% on seasonal effects in January and unfavourable base effects in May. The second half of next year will likely see a sharp downtrend – reflecting this year’s high base and further impact of tighter policy, pulling inflation to 40-45% by the end of the year. At the November MPC meeting, the CBT raised the one-week repo rate to 40.0%, providing guidance that: the pace of monetary tightening would slow the tightening steps would be completed in a short period of time, the monetary tightening required for sustained price stability would be maintained as long as necessary. Accordingly, we expect that the interest rate hike process will be completed at 45.0% with more limited increases of 250 basis points in December and January meetings. However, better-than-expected inflation readings and currency stability may also lead the bank to end the hiking cycle after a single 250bp hike.

Energy – OPEC crude oil production softens in November Sentiment in the oil market remains negative this morning, with both ICE and WTI futures trading almost 1% lower after the announcement from the OPEC+ meeting failed to convince the market about a tighter oil balance in the immediate term. Pessimism over compliance with the new deal remains one of the major concerns for the market for now. Initial data shows that OPEC crude oil production dropped to around 28.05MMbbls/d in November 2023 compared to 28.19MMbbls/d in October 2023, according to a Bloomberg survey. The BBG survey estimates that supply from Iraq and Nigeria dropped by 50Mbbls/d each, while Iran and Kuwait also lowered production by 40Mbbls/d each. Higher production from Saudi Arabia and Libya helped offset some of the production losses for the month. Weekly data from Baker Hughes shows that the US added five oil rigs over the last week, taking the total oil rig count to 505, whilst the gas rigs fell by 1, taking the total rig count (oil & and gas combined) to 625 for the week ended 1 December. US oil rigs have now increased to their highest level in nearly two months, although the recent weakness in oil prices could weigh on further rig additions over the coming weeks. The Al-Zour refinery in Kuwait is now fully operational as the third of the three mini refineries was brought online on Sunday. This will gradually increase the refining capacity of the facility to 615Mbbls/d from the current capacity of 410Mbbls/d. The plant halted its operational activities last month after a fuel gas feed was halted. Al-Zour is one of the largest oil-processing facilities in the Middle East and it is expected to boost the nation’s refining capacity to about 1.5MMbbl/d. The latest positioning data from CFTC shows that speculators decreased their net long position in NYMEX WTI by 6,408 lots for a ninth straight week over the last week, leaving them with net longs of 98,137 lots as of 28 November 2023, the lowest since the week ending on 4 July 2023. In contrast, money managers increased their net longs in ICE Brent by 11,630 lots over the last week after reporting five consecutive weeks of decline, leaving them with a net long position of 166,735 lots as of last Tuesday.

The Commodities Feed: Gold hits record highs Gold prices jumped above US$2,100/oz, surpassing their previous highs made in August 2020 on growing expectations for US rate cuts next year. A weaker US dollar and lower treasury yields, along with increased geopolitical uncertainty, are prompting the higher prices. We also look at what else is making news this Monday in commodities.   Metals – Gold rises to record highs Spot gold prices jumped to record highs of US$2,135/oz this morning on rising expectations of easing monetary policy in the US before paring most of those gains. The latest comments from Fed Chair Jay Powell suggest that monetary policy in the US is “well into restrictive territory”, leaving the market speculating that the Fed might start trimming interest rates early next year. Meanwhile, an easing US dollar and extended weakness in the treasury yields continue to support the buying sentiment for gold. Looking at the speculative positions, the latest CFTC data shows that the money managers increased their net longs in COMEX gold by 29,516 lots for a second consecutive week, leaving them with a net long of 144,410 lots as of last Tuesday, at the highest level since 9 May. The speculative buying interest for gold is likely to continue in the near term, given the ongoing geopolitical tensions and expectations of lower interest rates in the US. In copper mine supply, First Quantum Minerals has suspended production guidance for the Cobre Panama mine for 2023. First Quantum stopped commercial production at the mine last week after the Supreme Court of Panama ruled against a contract between the government and the mining company. It is estimated that the mine holds around 1.5% of the share of the global copper mined supply. Meanwhile, the latest data from Fastmarkets show that treatment charges for copper paid by Chinese smelters have dropped below US$70/t for the first time since August 2022, indicating a tightening ore supply. The LME data shows that cancelled warrants for copper increased by 5,359 tonnes to 34,525 tonnes as of Friday, the highest since 20 July. Most of the increments were reported from New Orleans warehouses. On-warrant inventories for copper dropped by another 6,350 tonnes for a seventh straight session to 139,725 tonnes at the end of last week, the lowest since 12 September. The LME cash/3m spread for copper tightened to a contango of US$72/t as of Friday, compared to a contango of US$77/t a day earlier. In China, the recent data from the Shanghai Futures Exchange (ShFE) shows that copper stocks fell sharply by 9,729 tonnes (-27% WoW) over the last week to 26,149 tonnes as of 1 December, the lowest since May 2009. Among other metals, zinc stocks decreased by 3,425 tonnes to 34,541 tonnes (lowest in over a month), while lead and aluminium inventories rose by 15.6% WoW and 1.3% WoW, respectively, as of Friday.

CEE: Rates should drive FX to further gains This week we start today in the Czech Republic, where wage numbers, key to the central bank, will be released. Markets expect real wages to fall 0.7% YoY in Q3, while the central bank expects 1.0% YoY. The National Bank of Poland (NBP) has a press conference scheduled today after the MPC published a statement on Friday on the incoming government's intention to suspend the governor. On Wednesday and Thursday, we will have some hard economic data across the region including industrial production or retail sales in the Czech Republic, Hungary and Romania. Also on Wednesday, we will see a decision from the NBP. We expect interest rates to be unchanged in line with market expectations. So the main event here will be the press conference on Thursday. On Friday, we will see inflation numbers in Hungary, where we expect another jump down from 9.9% to 7.9% YoY, slightly below market expectations. Also on Friday, S&P will publish a rating review of Hungary. The agency cut the rating down earlier this year, so we can't expect much new here. CEE FX remains volatile following the global story. However, if EUR/USD stabilises this week, rates should take over as the main driver again. Here, the picture for CEE remains positive. With core rates falling and lower beta of local rates in the region, interest rate differentials have improved in favour of CEE across the board. We expect more gains from PLN, which should be supported by the NBP's hawkish turn. EUR/PLN briefly touched lows of 4.320 on Friday, and we expect further testing of lower levels later. EUR/HUF, despite wild moves last week, should head lower after HUF rates stabilised. On the other hand, we expect EUR/CZK to move up towards 24.40 after the dovish data expected this week.

GBP: ECB vs. BoE story dominates Dovish commentary from the ECB has now seen investors pricing ECB rate cuts several months ahead of the Bank of England (BoE) next year and expectations build of a deeper easing cycle in the Eurozone than in the UK. We disagree with that pricing and think the BoE will deliver more hikes than the ECB next year. This probably means that EUR/GBP does not need to spend too much time below 0.8600. Indeed, 0.8500 represents very strong support and we remain happy with our forecasts of EUR/GBP edging up to the 0.88/0.90 area into next year. The UK data calendar is very quiet this week, with just Friday's release on inflation expectations of note. The bigger driver of EUR/GBP this week will be any ECB pushback against dovish pricing of their 2024 policy cycle.

EUR: ECB doves are landing punches EUR/USD suffered quite a sharp setback on Friday after Bank of France Governor, Francois Villeroy de Galhau, said that barring shocks, the ECB tightening cycle was over and that the ECB would consider the question of easing in 2024. Money markets price the first full ECB cut by next April - marginally earlier than the Fed. This was always the risk that the ECB would be cutting at a similar magnitude to the Fed in 2024 - meaning that EUR/USD did not need to rally much. That is why our EUR/USD quarterly profile in 2024 is still quite modest - 1.10 for 2Q24, 1.15 for 4Q24 and why we have favoured short positions in cross rates like EUR/AUD - which has fallen 2.5% over the last couple of weeks. This week sees some second-tier eurozone data (Sentix, retail sales, final 3Q23 GDP revisions) but also ECB speakers including President Christine Lagarde at 15CET today.  She will probably try to keep the peace between the hawks and the doves by suggesting a further rate hike is still on the table.  1.0825 now looks good intra-day support for EUR/USD. We suspect that it would have to take a very strong payrolls report to see EUR/USD trade 1.0700 again. But then the euro can remain soft on the crosses for the time being. Also today, look out for some updates on Riksbank thinking; the minutes of its November meeting are released at 0930CET. We described this meeting as a hawkish hold.  This is followed by a speech from Riksbank's Anna Breman at 11CET.

FX Daily: Euro remains the weakest link The dollar starts the week in mixed fashion. USD/JPY is trading at a new corrective low, while EUR/USD continues to lick its wounds after a torrid session on Friday. The highlight of this week's data calendar will be the November US jobs report on Friday; there are also central bank policy meetings in Canada and Poland USD: Powell speech provides some support The dollar turned a little higher on Friday - largely led by the drop in European currencies after investors latched onto some dovish comments from ECB officials. Also supporting the dollar later in the day, however, were comments from Fed Chair, Jay Powell.  He was much more equivocal than his colleague, Christopher Waller, who earlier in the week had signalled that the inflation battle was nearly won. Indeed, Powell's comments left in the prospects of further rate hikes - which very few in the market believe will materialise.  Against this backdrop will the dollar trade on US data this week. Given the blackout period ahead of the FOMC meeting on December 13th, there will be no Fed speakers this week. Instead, the focus will be on some quite important data. Beyond today's Durable Goods Orders, tomorrow sees the release of US services ISM and the JOLTS job opening data. Do job openings correct back lower and suggest a better balance in the US labour market - a mild dollar negative? Wednesday then sees the discredited ADP jobs data ahead of Thursday's initial claims. But the main event of the week is the November NFP report on Friday. Consensus expects a modest +180k, an unchanged unemployment rate and steady average earnings. Given a propensity for investors to put money to work outside of the dollar, we think a consensus outcome would be a mild dollar negative. We think it would really have to be a strong number to put the idea of another Fed rate hike back on the table. We favour DXY trading a 103-104 range through the week and suspect that investors will have a bias to sell in the 104.00/104.20 area.

Global Macro and Markets Global markets:  Fed Chair, Jerome Powell, tried to sound a hawkish tone at his speaking event on Friday, talking down the likelihood of rate cuts. But markets latched onto a remark that policy was now “well into restrictive territory” as a clue that there was a greater chance of rate cuts next year than Powell was letting on. 2Y Treasury yields plunged 14.2bp to 4.538%, while the yield on 10Y Treasuries dropped 13.1bp to 4.196%. So far, there has been no obvious response from EURUSD, which you’d imagine would rise given the magnitude of this fall in US bond yields. However, the falls were matched very closely by falls in European bond yields on Friday too, as markets seem to be swinging around to the idea of meaningful ECB cuts as well.  The AUD rose sharply though, rising to 0.6687. Cable was also up to 1.2721. And the JPY has plunged to 146.33, its strongest since 11 September. Asian FX was mixed on Friday, though we can expect the laggards (KRW, TWD and MYR) to make up ground today. The rest of the pack will also likely follow the G-10 lead. Rising rate cut expectations gave US stocks another reason to rally on Friday, though the gains were relatively muted. The S&P 500 and NASDAQ rose slightly over half a per cent. G-7 macro:  Friday’s main data release was the manufacturing ISM index. This was unchanged at 46.7, a weaker outcome than had been expected. With non-farm payrolls due on Friday, the drop in the employment index from 46.8 to 45.8 probably carried more weight than the increase in the new orders index from 45.5 to 48.3. Both indices, as well as the headline, remain in contraction territory. Today is relatively light for macro data. We get the final US durable goods orders figures for October, along with the October factory orders figures which are derived from them. China:  China Evergrande Group is due to have its future determined today by a Hong Kong court hearing to determine whether a creditor request for the company to be wound up will be granted. The Group has outstanding liabilities of around $327bn. Liquidation will place China’s housing market, which has been showing signs of declining at a more rapid pace in recent months, under further downward pressure.   India:  Ahead of next year’s lower house elections, India’s ruling BJP party has won three state elections at the weekend, taking two of them from opposition parties.   What to look out for: South Korea GDP and China Caixin PMI services later in the week US durable goods and factory orders (4 December) South Korea GDP (5 December) Japan Tokyo CPI inflation and Jibun PMI services (5 December) Philippines CPI inflation (5 December) China Caixin PMI services (5 December) RBA meeting (5 December) Singapore retail sales (5 December) US JOLTS and ISM services (5 December) Australia GDP (6 December) Taiwan CPI inflation (6 December) US ADP employment and trade balance (6 December) Australia trade (7 December)China trade (7 December) Thailand CPI inflation (7 December) US initial jobless claims (7 December) Japan GDP (8 December) India RBI meeting (8 December) Taiwan trade (8 December) US NFP (8 December)

Italian inflation surprises to the downside in November This is still predominantly an energy story, but developments in the core measure and in some services suggest that the softening economic environment is increasingly having a role.   Still mostly an energy story The disinflationary process proved again more marked than expected in November. According to preliminary ISTAT data, the national headline inflation came in at 0.8% YoY (from 1.7% YoY in October), the lowest level since March 2021. Once more, the main driver of the yearly decline was energy goods, both regulated ones (-36% YoY from -36% in October) and non-regulated (-22.5% YoY from -17.7%), helped to a smaller extent by non-fresh food, recreational services and transport services. These falls more than compensated for a moderate uptick in fresh food inflation. Thanks to the energy goods drag, in November goods inflation entered negative territory, widening the gap (now at 5 percentage points) with decelerating but still positive services inflation.   Core inflation developments suggest other things could soon be at work A better picture of the underlying inflationary trend is offered by core inflation, which excludes energy and fresh food. Core fell to 3.6% (from 4.2% in October), confirming an accelerating disinflationary trend. Service price deceleration in recreational and transport services provides additional evidence that the re-opening effect is definitely tailing off. The softening economic environment should, in principle, favour the extension of the disinflationary pressures to other parts of the service sector domain. Admittedly, this is not what the price intention component of the services survey was telling us in November (a second increase in a row of price increase balance), but should the economic slack continue, and energy price pressures remain contained over the winter, tamed pricing intentions should prevail.   The disinflationary process could prove stronger than expected in 2024 It seems that the softening economic environment is adding an extra boost to the disinflationary process beyond more obvious base effects in the energy component. The latter will continue impacting the headline inflation profile, and will likely push up the headline measure over the coming months, but an average 2024 inflation reading close to 2% looks now more than a distinct possibility.

Leading European retailers have set targets to shift from animal-based to plant-based products Overview of quantitative and qualitative targets   Regulation: tougher on food waste and greenwashing, but hesitant on consumption taxes Because of the share of the food system within total emissions and the far-reaching European ambitions on climate action (the 55% reduction target for the whole economy in 2030 and a recommendation for a 90% reduction target in 2040) it’s very likely that policymakers will closely look at all their instruments to make sure that there is a business case for a rapid reduction in food-related emissions. Which options do policymakers have? Taxes and levies to deliver external effectsThese can be targeted at producers or consumers. The EU already has an emission trading system for carbon-intensive sectors and this might be extended to agriculture. Proposals for consumption taxes on certain food products like meat have shown that it can be a challenge to garner public support. Still, it’s not unthinkable that some countries introduce some form of taxation and recent scientific research on meat taxes argues that support can be raised by proper design. Regulations and norms to raise standardsLivestock farmers across the EU face additional (national) environmental regulations that drive up production costs and eventually drive up prices of animal products. The proposed EU targets on food waste and the proposal for the green claims directive are other examples of regulation. Campaigns to raise awareness among consumers and companiesGovernments can raise awareness about sustainable diets and the benefits of reducing food waste by initiating campaigns and public-private partnerships. Subsidies and compensation to stimulate changeGovernments can provide public funding for R&D, such as research into novel protein sources or carbon sequestration in farmland. For example, Denmark, a large meat and dairy producer and exporter, recently published its national action plan for plant-based foods.   How food manufacturers can take advantage of the need for more sustainable diets The growth in food products with sustainable logos shows that there are certain aspects of sustainability that consumers value. However, data on meat and dairy consumption shows that consumers often refrain from taking more drastic steps to green their diets. Meanwhile, for retailers, emission reduction targets provide a stronger strategic incentive to get consumers to change. Retailers increasingly consider the carbon footprint of food products an important metric and food manufacturers can do several things to take advantage of this trend.It starts with establishing the environmental footprint of their products. Besides helping to determine actions to further reduce emissions, this data can also help food makers stand out from their competitors if they do better than the industry average. Furthermore, we expect that calls for a shift between animal- and plant-based categories will continue to influence market dynamics in Europe. Food manufacturers and retailers can do their part by developing and improving plant-based alternatives. But a more profound structural change in the consumption of animal products also depends on the effective use of policy instruments.

To what extent do you agree or disagree with the following statements? I trust the sustainability claims of food manufacturers on their products   Protein track How to encourage the consumption of protein products with a lower carbon footprint Encourage shifts towards products with a lower carbon footprint within the meat and dairy category (poultry instead of beef) and ‘redefine’ the default option by applying or suggesting smaller serving sizes. Leverage menu or recipe suggestions offered to consumers. Swedish retailer ICA works with a climate score for recipes, while Unilever changed recipes for its meal starter kits to include more vegetables and less meat. Broaden and strengthen the plant-based offering. Some retailers, such as Lidl, have specific targets and many meat and dairy companies have ventured into plant-based alternatives. Food waste track How to help consumers reduce food waste at the household level Changes in communication on expiry dates, for example, dairy companies like Arla and Danone have moved from ‘best before’ to ‘often good after’ to prevent people from throwing away products that are still fit for consumption. Offer portion sizes that are suited for smaller households and provide advice on how to store or use any leftovers. Give menu suggestions that offer a broader range of ingredients (e.g. vegetables) which can inspire consumers to use any leftovers. Sustainability label track How to stimulate additional sales of more sustainable products Explain why these products have added value for individual consumers and give them a prominent position in their marketing efforts. Raise the bar for the default option. Examples include Dutch retailers and their suppliers who have moved collectively to a higher standard for poultry meat and German retailers which are moving towards higher animal welfare standards for meat and dairy products.   Emission reduction targets give companies a stronger incentive to encourage consumers to change dietsMany investors expect corporates to align with climate targets, and submitting formal CO2 reduction targets to bodies like the Science Based Targets initiative carries obligations. So food companies, and especially retailers, increasingly have an interest in encouraging a shift in consumer demand due to strategic incentives. One example is that several major European retailers aim to grow the share of plant-based protein products at the expense of animal-based products for environmental and health reasons. As a result, they have been building a larger range of plant-based products and are working towards price parity. While these are soft commitments, they do give an idea of the direction these retailers want to take and what they expect from their suppliers.   But the economic incentive is often missingHowever, in many cases, the economic incentive is missing. Stocking more climate-friendly products that no one buys, convincing customers to buy less of your product and helping consumers to discard less food are not viable business strategies due to their negative impact on sales volumes. Here, markets fail to provide the most desirable outcome for society which warrants policy interventions that help to make that the products that land on our plates are more sustainable.

Food waste decreasing, but further declines needed Reducing food waste provides another big opportunity to lower the environmental impact of food production and consumption. It’s estimated that almost 60 million tonnes of food waste is generated annually in the EU, with over half occurring within households. Trend data is scarce, but food waste data for Spain and the Netherlands hint at a declining trend. The extraordinary increase in food prices might give households a stronger financial incentive to reduce food waste, but in general, moral considerations (“waste is wrong”) mainly influence our behaviour. Since the EU Commission has proposed that member states should reduce household food waste by 30% in 2030 compared to 2020, it's very likely that additional actions, such as awareness campaigns and tools that enable consumers to change their routines, will be taken. For food companies, a reduction in household food waste aligns with the UN’s sustainable development goals and could help them lower some of their scope 3 greenhouse gas emissions.   Households in Spain and the Netherlands waste less food, further drop needed to meet EU target Food waste at households in kilograms per capita   Sales of food products with sustainable logos are booming Across Europe, the market for food and drink products with sustainable certification is booming. In the Netherlands for example, sales of certified food products have more than doubled in the past five years. They also increased by 50% in the UK between 2016 and 2021. Such certification generally signals that more attention is paid to the environment, labour conditions or animal welfare during production. So it’s not a given that certified products also have a smaller carbon footprint than products without a logo. Certified products are present in every food category, but German, Dutch and Belgian consumers in our survey mainly expressed a higher willingness to pay more for sustainable meat, fruit and vegetables.   But many consumers are not willing to pay a premiumThe sales growth of certified food products indicates that food manufacturers and retailers are succeeding in steering part of consumer spending towards more sustainable products. It is important to note that certified products are not on everyone’s shopping list. For many people, sustainable food needs to be affordable in the first place. Almost one third of all German and half of all Dutch and Belgian consumers in our survey said they were not willing to pay more for sustainable food products in any category. This can be either because they can’t afford to pay extra, don’t trust these claims or don’t see the benefits.   Products with sustainability logos gain market share in Dutch food retail Share within total revenue     Many consumers tend not to trust sustainability claims on food products The increase of (inter)national sustainability-related labels and claims on food products has also attracted criticism. A study from the EU Commission found that 40% of claims on all products, including food, were entirely unsubstantiated. The EU Commission is working on stricter regulation which helps consumers to separate the wheat from the chaff. Our research shows that currently about one in five Spanish and Polish consumers don't trust sustainability claims on food while consumers in Germany and the Netherlands are even more sceptical.    

Why consumers are not yet putting the climate first By wasting less food and eating less meat and dairy, consumers can help to slow down climate change. However, consumers in the EU have barely changed their diets. Emission reduction targets give food companies a reason to encourage consumers to change, but without regulation, the economic incentive to move to a more climate-friendly diet remains weak.   Why changing the way we eat can be a big win for the climate According to the Intergovernmental Panel on Climate Change, the food system is responsible for 21% to 37% of total global greenhouse gas emissions. Of course, we all need to eat. But changing the way food is produced and what food is consumed can reduce the negative impact on the climate. Action is clearly needed and at COP28 this year, this subject will be addressed for the first time, with discussions centred on the changes needed to limit the rise in global temperatures to between 1.5 and 2 degrees.   While European consumers are increasingly aware of sustainability issues connected to food, changing actual behaviour remains challenging. That’s why in this article we take a look at how food manufacturers and retailers can influence consumers and what incentives they have to do so.   Consumers and scientists not aligned on most effective ways to make diets more sustainable European consumers can do many things to make their diets more sustainable. When we asked about the best approach, German consumers said that ‘eating more local products’ was the most effective route followed by reducing food waste. Dutch and Belgian consumers consider reducing food waste to be the most effective measure. The importance of reducing food waste is also aligned with the view of experts (see for example UN, IPCC). However, consumers tend to give less weight to reducing their consumption of meat and dairy. This is a surprising result since shifting towards a more plant-rich and less animal-rich diet is often considered by scientists and public institutions to be the most effective way for Europeans to reduce the climate impact of their diet.   What do you see as the most effective way to make your own diet more sustainable? Weighted average based on responses of German, Dutch and Belgian consumers   Meat and dairy consumption largely unchanged Meat and dairy are a cornerstone of European diets, providing the majority of our protein and a range of other nutrients. But animal products like beef also account for a disproportionately large share of all food-related greenhouse gas emissions. Meat and dairy companies are very aware of this and are increasingly adopting net zero targets for their own operations and their supply chains in 2050. Yet for the time being, lowering consumption can be another route for consumers to reduce the climate impact of their diet, which also carries health benefits. While there is a certain level of willingness among consumers to reduce meat intake, actual meat consumption per capita in the EU has been fairly stable since the 1990s   Less beef and pork, more poultryStill, there are changes in the type of meat that Europeans eat. Beef and pork consumption in the EU has dropped by 2.5% (beef) and -10% (pork) per capita in the past decade. Poultry consumption is growing (+16.5%) and poultry has a much lower environmental footprint compared to other types of meat. Because of this composition effect, the carbon footprint of a single European person's meat consumption is about 3% lower compared to 10 years ago. Nonetheless, total livestock-related emissions in the EU have been flat since 2010 because improvements in terms of carbon intensity per kilogram have been offset by increases in total production.Meat consumption in Germany dropsMeat consumption data for several countries shows only slight changes during the last decade. The downward trend in Germany since 2018 stands out. This might be explained by a combination of factors such as sustainability considerations, health reasons, inflation, improved availability of alternatives, negative media coverage and demographic changes (meat consumption per capita is generally lower among the elderly and people with a non-western background). However, these factors are not unique to Germany and we should point out that meat remains very popular, including in Germany.   Meat consumption fairly stable in many EU countries, except in Germany Meat consumption per capita*, index 2012 = 100   Less milk but more cheese EU dairy consumption per capita has gone up during the last decade but seems to have stabilised more recently. Again there are shifts within the category. Consumption of liquid milk has dropped quite significantly in volume terms, for example by 8% in Germany and 12% in the Netherlands over the past 10 years. But at the same time, consumers have started to eat more dairy products, including cheese, which is supportive for milk demand since it requires about eight litres of milk to produce a kilogram of cheese.For consumers, milk has proven to be one of the easiest animal products to substitute. There are more and more suitable alternatives available and the price gap between milk and plant-based alternatives has become smaller. However, for cheese, which is the favourite animal product for many, substitution has proven to be much harder.   Germany and the Netherlands have witnessed a drop in dairy consumption since 2020 Dairy consumption in milk equivalents per capita*, index 2012 = 100    

Polish consumption quickly recovers but overall GDP recovery is slow Initial estimates of Polish GDP growth in 3Q23 were revised to 0.5% Year-on-Year from 0.4%. It's the first quarter this year with YoY GDP growth. We saw a consumption recovery along with robust investment growth. The drag from inventories remains significant. We anticipate a more pronounced GDP growth in 2024 at around 3%, driven by private consumption. After two quarters of declines in household consumption, 3Q23 saw a rebound (0.8% YoY), driven by strong wage dynamics (in real terms, the third highest in the GBI index) and overall disposable incomes. Investment rose 7.2% YoY, following a 10.5% YoY increase in 2Q23. Inventory change continued to have a strong negative impact on GDP, subtracting as much as 7.7pp from the annual growth rate. In contrast, the positive contribution of net exports to GDP continued (5.9pp), driven by an improving foreign trade balance. In 3Q23, exports declined by 11.0% YoY, while imports contracted by 20.3% YoY. The previous quarter brought a long-awaited economic rebound, although it was limited. Consumption, which had been under pressure from high inflation and the consequent erosion of households' real purchasing power, is recovering. Meanwhile, solid investment growth continues, driven by large companies and the public sector. Investments are a bright spot during the current cycle, and they are driven by strong corporate profits, outlays in the energy sector, and high spending from EU funds before the conclusion of the 2013-2020 (t+3) multi-year EU budget and approaching local elections in Poland. On the other hand, the negative drag from the inventory adjustment cycle has not waned. Data for October and our forecasts for November indicate that the recovery should continue in 4Q23, but its pace remains slow. In particular, the industrial sector remains under pressure, as well as trade related to durable goods (excluding the automotive sector) and exports. We expect GDP growth to accelerate to around 2% YoY in 4Q23 and see economic growth for the whole of 2023 at 0.4% YoY. We anticipate a more pronounced acceleration next year, mainly due to a further recovery in private consumption. Next year, we forecast GDP growth at 3%. With a consumption-driven pro-inflationary GDP structure in the coming quarters, the aim of bringing CPI back to target should be challenging. The MPC will probably be in a 'wait-and-see' mode until at least March, pending new macroeconomic projections.

Eurozone inflation drops much more than expected again in November Headline inflation fell from 2.9 to 2.4% in November, while core inflation dropped more, from 4.2 to 3.6%. This shows that signs of an imminent victory on inflation are mounting for the European Central Bank. When will they dare to admit so themselves? We expect a first rate cut before the summer.   The decline in inflation was seen across the board in November. Energy inflation is still driven by significant base effects (-11.5% year-on-year), and food inflation dropped from 7.4 to 6.9% year-on-year. Goods and services inflation also both fell significantly, to 2.9% and 4% year-on-year, respectively. In fact, on a monthly basis, core inflation was negative. We always expected inflation to drop significantly in the final months of the year, but the process of disinflation is happening even more quickly than we expected, particularly for core inflation, where expectations were for price pressures to remain more stubborn. But weak demand and quickly fading supply-side problems have set core inflation on a much quicker path down than thought a few months ago. Taking the monthly pace of price increases seen in the past three months, core inflation will drop below 2% well before the end of next year. While we think that might be a bit optimistic given the remaining price pressures coming from wages, for example, it does show that inflation is now much more benign than earlier in the year. For the ECB, signs of an imminent victory on inflation are mounting. The central bank worries about factors like wage growth and possible spikes in the energy market that could put inflation on a higher path again. But current monetary policy is sufficiently restrictive as bank lending data out earlier this week showed that the effects of higher rates are impacting lending significantly. Also, there is still a lot more of the impact of tightening to come as interest payments are still increasing. The market is therefore right to start looking at rate cuts for 2024. We think the first one could well happen before the summer.

Eurozone inflation drops much more than expected again in November Headline inflation fell from 2.9 to 2.4% in November, while core inflation dropped more, from 4.2 to 3.6%. This shows that signs of an imminent victory on inflation are mounting for the European Central Bank. When will they dare to admit so themselves? We expect a first rate cut before the summer.   The decline in inflation was seen across the board in November. Energy inflation is still driven by significant base effects (-11.5% year-on-year), and food inflation dropped from 7.4 to 6.9% year-on-year. Goods and services inflation also both fell significantly, to 2.9% and 4% year-on-year, respectively. In fact, on a monthly basis, core inflation was negative. We always expected inflation to drop significantly in the final months of the year, but the process of disinflation is happening even more quickly than we expected, particularly for core inflation, where expectations were for price pressures to remain more stubborn. But weak demand and quickly fading supply-side problems have set core inflation on a much quicker path down than thought a few months ago. Taking the monthly pace of price increases seen in the past three months, core inflation will drop below 2% well before the end of next year. While we think that might be a bit optimistic given the remaining price pressures coming from wages, for example, it does show that inflation is now much more benign than earlier in the year. For the ECB, signs of an imminent victory on inflation are mounting. The central bank worries about factors like wage growth and possible spikes in the energy market that could put inflation on a higher path again. But current monetary policy is sufficiently restrictive as bank lending data out earlier this week showed that the effects of higher rates are impacting lending significantly. Also, there is still a lot more of the impact of tightening to come as interest payments are still increasing. The market is therefore right to start looking at rate cuts for 2024. We think the first one could well happen before the summer.

Bank of Korea eases hawkish stance but no rate cuts in sight The possibility of a further rate hike is now seen as off the table, but the Bank of Korea appears to be signalling that the easing option is still a long way off.   BoK keeps policy rate at 3.5% in unanimous decision The BoK made another decision to stay on hold today as widely expected. Governor Rhee Chang-yong highlighted that the inflation path remains uncertain, thus the central bank would keep the current restrictive policy stance for a sufficiently long time. However, we still think the overall stance has become less hawkish compared to the previous meeting and the possibility of a further rate hike is now seen as being off the table. In the statement, the BoK removed the phrase pertaining to the "need for an additional rate hike". Also, although today's decision was unanimous, two out of the six board members view 3.5% as the terminal rate and four are open to a 0.25% hike option amid any sudden macro condition changes. However, the Bank of Korea appears to be signalling that the easing option is still a long way off. The BoK's latest outlook report clearly reflects its hawkish stance.    BoK's quarterly outlook report The Bank of Korea also released its updated quarterly outlook report. The GDP outlook for 2023 remained the same, at 1.4% year-on-year, despite the disappointing October monthly activity data while the 2024 outlook was revised down modestly from the previous 2.2% to 2.1%. The BoK considers the October drop mainly due to a technical payback in the semiconductor industry and thus expects a rebound soon. The BoK foresees a recovery in exports and facility investment but domestic growth momentum to soften. For the inflation outlook, the outlook for 2023 and 2024 was upwardly revised to 3.6% and 2.6%, respectively, from the previous 3.5% and 2.4% mainly due to lingering cost-push pressures.   We agree with the BoK's view that growth will accelerate in 2024 and will be led by exports and facility investment. But we only foresee a modest gain of 1.8%, lower than the BoK's expectation of 2.1%. We are not quite convinced by the above-potential level growth outlook, especially when the economic conditions of major trading partners are expected to soften to some extent. Also, forward-looking consumption and construction investment data clearly point to a downward trend. Meanwhile, the export recovery will likely be quite narrow in semiconductors. At the press conference, Governor Rhee said he was not thinking of stimulus for growth at the moment, although more selective ways to support financially vulnerable groups will be needed. Thus, tight financial conditions will likely continue for several more months and household consumption may worsen more than currently expected.   In terms of inflation, supply-driven cost-push pressures have been stronger than expected over the past couple of months, thus the inflation trend hasn't cooled down much. We think it will eventually stabilise to the low 2% level sometime in the third quarter. But, there are both upside and downside risks for the inflation outlook. However, once inflation begins to fall to the 2% range in the first quarter, the BoK's stance will likely shift towards easing. We do not have a clear idea of how long it means to "maintain tight monetary policy for a sufficiently long period of time" as the BoK states. Governor Rhee dropped a hint by saying he personally thinks it could be "more than six months".   If inflation returns to the 2% level from early next year and domestic growth conditions worsen, then we expect the BoK to change its policy direction as early as the second quarter. However, if the financial imbalance does not improve, the BoK's rate cut is likely to be pushed back to the second half of next year.   Bank of Korea expects GDP to grow 2.1% YoY in 2024

French inflation falls more sharply than expected Inflation fell sharply in France in November, to 3.4% compared with 4% in October, thanks to weaker growth in prices across all categories. The trend towards disinflation is therefore well underway in France and will continue over the coming months. Inflation falls to 3.4% in October Consumer price inflation stood at 3.4% in November, compared with 4% in October. This slowdown in inflation is mainly due to a clear slowdown in the growth of energy prices, which rose by 3.1% year-on-year in November, compared with 5.2% the previous month. But the slowdown is also visible in other categories of expenditure. Food prices rose by 7.6% year-on-year in November, compared with 7.8% in October, manufactured goods by 1.9% compared with 2.2%, and services by 2.7% compared with 3.2% the previous month. The latter development is very good news, as service prices had accelerated in recent months. So it seems that, contrary to what the PMI surveys indicated, the weaker economic context is also starting to play a role in this sector, limiting inflationary pressures, despite wage rises. Inflation, according to the harmonised index, which is important for the European Central Bank, stood at 3.8%, down from 4.5% in October.   Higher inflation in France than elsewhere Despite the better-than-expected figures for November, French inflation remains higher than in other European countries, according to the harmonised index (see our analysis of the situation in Germany and Spain). This difference can be explained by less positive base effects in France than elsewhere. Whereas a year ago, energy inflation rose sharply in the other European countries, the increase was much more moderate in France, thanks to the price shield and fuel rebates. As a result, energy inflation is still making a positive contribution to French inflation, unlike in other countries. Despite higher inflation in France than in neighbouring countries, the cumulative rise in prices since the start of the pandemic has been much lower in France than elsewhere in Europe. According to data from the harmonised index, consumer prices in France rose by 15.6% between January 2020 and October 2023, compared with 19.3% in the eurozone and even 21% in Germany over the same period. The less favourable base effects in France than elsewhere will continue to play a role in the coming months, and inflation is likely to fall slightly less rapidly than in neighbouring countries.   Disinflation well underway Nevertheless, the disinflation process is well underway and will continue over the coming months, against a backdrop of marked economic slowdown. The data published by INSEE today, which shows that household consumption of goods fell by 0.9% in October, confirms once again that economic momentum is slowing markedly. We are expecting growth in the fourth quarter to be weaker than the already weak figure for the third quarter (+0.1% quarter-on-quarter), as the risk of a contraction in activity cannot be ruled out. For 2024, we are expecting average growth of 0.6%, compared with 0.9% in 2023, which will contribute to the expected fall in inflation. In particular, inflation in food and manufactured goods should continue to fall over the coming months as a result of lower global demand, high inventories and lower production costs.

CEE: Polish inflation supports stronger zloty Today the first interesting data in the CEE region will be published this week. PPI in Hungary was released this morning. Later today we will see November inflation and the second reading of 3Q GDP in Poland. We expect steady headline inflation at 6.6% year-on-year, in line with market expectations. We expect a further decline in core inflation, but it will be accompanied by less favourable developments in energy prices as gasoline prices bounced back after two months of declines. FX erased some gains yesterday. Although we expected the CEE to move higher, the zloty lost the most in the region despite our expectations. However, today's numbers could put the topic of a hawkish turn by the National Bank of Poland in November back on the table and adjust market expectations for the coming meetings. There is a clear consensus of stable rates for December, however, the market still sees roughly 125bp for next year. After the fall in rates over the last two days at the short end of the curve following core rates, we see room here for rates to go higher again, supporting a stronger zloty. Thus, if today's numbers confirm inflation persistence, we expect EUR/PLN to test 4.320.

NOK: Possible reduction in December FX purchases Norges Bank will announce the amount of daily FX purchases for December today. Our model estimate based on oil prices and petroleum revenue forecasts suggests purchases should be kept at 1,400mn for December. However, it’s worth highlighting that Norges Bank scaled back FX operations quite substantially in December (compared to the previous month) over the past three years, more than what our model would have suggested. Last year, we thought lower FX purchases were also signalling some openness to easing pressure on NOK. Now, given the substantial support offered via higher rates, that is less likely and we still estimate relatively elevated FX purchases this year. That might change should NOK face fresh significant pressure or the Norges Bank turns more dovish on monetary policy. NOK has been strong along with other high-beta currencies of late, and we are bullish on the currency in the medium term, but we suspect the rally has started too early. That is, however, only due to external factors, as markets have priced out the chance of a Norges Bank hike in December (20% priced in now) and a potential reduction in FX purchases in December is positive for the krone.

EUR: A widely expected further drop in inflation Early signals from Germany and Spain have been encouraging: inflation in the eurozone is falling faster than expected, also on the core side. Today, the rest of the area’s countries will release November’s inflation figures, with France’s CPI expected to have slowed to 3.7%, and the eurozone’s aggregate headline inflation seen decelerating from 2.9% to 2.7%, with the core rate moving from 3.9% to 4.2%. The implications for the euro would probably be material only if the figures come in surprisingly higher than expected. That’s because markets are already pricing in 75bp of easing by the European Central Bank in 2024, with no chance of any more hikes. Above all, the focus appears to be much more on the deteriorating growth outlook than on a well-telegraphed inflation slowdown.     That said, lower inflation is hardly ever good for a currency and may keep the euro's upside room capped today, even though data from the US could cause large swings in EUR/USD regardless. We still favour a return to sub-1.0900 as opposed to a sustainable rally beyond 1.1000.

FX Daily: Dollar rebound increasingly hinges on activity data The further decline in USD rates means that it will now be up to activity data to trigger a recovery in the dollar. We have a couple of days packed with important US releases into the weekend, as well as a key OPEC+ meeting. Inflation figures in the eurozone may not have a huge impact on the euro.   USD: Data takes over The dollar has found some support despite bullish sentiment on US bonds with Treasury yields breaking through key levels. When rates previously jumped in the US, the dollar proved highly sensitive to the initial move and less so as the bond sell-off continued: something similar appears to be happening now as Treasury yields extend their drop. That said, a key argument for a dollar rebound was probably the fact that the rate differential was still more favourable to the greenback than what the dollar level was implying: now, the room for a dollar rebound has shrunk based on pure rate fundamentals. In other words, US activity data needs to do the heavy lifting in a dollar recovery by reviving bond bears. Yesterday, the second release of 3Q US GDP showed even stronger growth (5.2% quarter-on-quarter annualised) than the preliminary 4.9%, but core PCE was weaker (2.3%) than the first release. We now have two busy days on the data side into the weekend. Today, jobless claims will be closely watched after last week’s drop to 208k, and given the proximity to payrolls. The consensus is for a rebound to 218k. Personal spending data is also key given the centrality of resilience in consumption in the soft landing debate: the consensus is for a decline to 0.2% in both personal income and personal spending in October. PCE inflation (the Federal Reserve's favourite indicator) is also expected to have slowed in October. That would not be a game changer for the dollar, however, since the disinflation story appears to have been absorbed by markets, and activity indicators hold considerably higher importance for FX. Fedspeak is also under very close scrutiny now. Rising bets on Fed easing have not been met by the sort of pushback we had heard in previous instances, and that is allowing dovish expectations to get stickier. Admittedly though, most comments by Fed officials continue to be about the short-term monetary policy outlook. Yesterday, Loretta Mester, Raphael Bostic and Tom Barkin all discussed the prospect of another hike – something markets have completely priced out and may only reconsider if inflation were to rebound materially. Incidentally, more and more FOMC members are endorsing the pause narrative, which is already fully priced in but is widening the path for market doves to speculate on future meetings. We are still doubtful the Fed will want to sit and watch as rates fall, given the lingering interest to keep financial conditions tight at the current juncture, so a more decisive pushback against rate cut bets remains a tangible risk for the FX market, and a secondary path for the dollar to find support outside of US data. We still expect DXY to climb back above 103.00, but watch for growing selling interest around 103.50 until (and if) key data releases halt the UST rally. It is also OPEC+ meeting day, and our commodities team believes the cartel will be focused on not disappointing the market, although downside risks for crude have admittedly risen.

South Korea’s disappointing monthly activity suggests sharp slowdown in 4Q GDP Manufacturing output, retail sales, and facility investment all declined in October. Sluggish consumption and investment are expected to weigh on growth in the current quarter.   All industry output slid 1.6% MoM sa in October, the first decline in three months Mining and Manufacturing industrial production unexpectedly dropped by 3.5% month-on-month, seasonally-adjusted (vs 1.7% in September, 0.4% market consensus) in October, mostly led by a plunge in semiconductor output (-11.4%). The sharp decline is probably a technical payback from the double-digit increase in the past two months. (13.5% in August, 12.9% in September). Importantly, semiconductor inventories levelled down quite rapidly, thus we are keeping our view on a semiconductor recovery unchanged for now. Meanwhile, partially offsetting the decline, electronics (10.4%) and vehicles (3.2%) output gained. Service activity moved down quite sharply -0.9% MoM sa in October for the first time in five months. Leisure and sports continued to gain (4.2%) but other major service sectors, such as whole/retail sales (-3.3%), finance (-1.2%), real estate (-3.0%), and accommodation (-2.3%), declined, reflecting the slowdown in the property market and private consumption.   Semiconductor output stays on recovery path despite plunge in October   Retail sales dropped -0.8% MoM sa in October, falling three times in the past four months The drop in non-durable goods (-3.1%) was the main reason for the overall decline. Durable goods sales rebounded 1.0% MoM sa for the first time in four months, boosted by strong mobile phone sales (12.1%) related to new model launches. However, vehicle sales dropped -1.75%, falling back after a temporary rebound in September. The government has extended its tax benefit programme for electric vehicle purchases until year-end to boost car sales, but we think high car financing costs will likely be a hurdle for a meaningful recovery.    Consumption will likely weaken further in 4Q23   Investment activity was a bit mixed in October For facility investment, machinery (-4.1%) and transportation equipment (-1.2%) fell in October as chip-making equipment imports declined, but machinery orders rebounded with quite strong demand from the private sector. We think IT investment will likely recover meaningfully early next year, but the investment in 4Q23 should be suppressed. On the other hand, construction completion rose by 0.7% MoM sa in October, marking the fourth consecutive month of increases. Despite the ongoing struggle in the property market and project financing, construction activity has slowed only marginally. We found that compared to the previous quarter, residential construction weakened as expected, but civil engineering held up pretty well. Forward-looking construction order data has mostly declined throughout the year, thus we continue to believe that construction will be the main drag on growth for a considerable time.   Construction will be a major drag on growth     GDP outlook Despite disappointing manufacturing IP results today, we continue to believe in a recovery in manufacturing, backed by solid semiconductors and vehicle output. More worrisome is consumption and investment. We believe tight financial conditions are starting to bite private consumption more meaningfully. For investment, IT equipment investment will likely rebound next year along with a recovery in global semiconductor demand and as the inventory adjustment ends, but construction investment will remain the main drag for a considerable time. Putting the latest soft and hard data together, we expect the current quarter GDP to decelerate considerably (0.1% quarter-on-quarter sa vs 0.6% in 3Q23). The Bank of Korea will likely keep restrictive policy settings as long as possible, given the recent pick up in household debt and sticky inflation. But the slowdown of the economy will likely shift the BoK’s policy stance towards easing in the first half of next year.

Rates Spark: All about inflation The rates rally found its confirmation in German and Spanish inflation data ahead of today's eurozone release, but finally seemed to pause after more hawkish Fed comments. A reassesment of inflation has been the main driver of the EUR rally since rates peaked in October, but the real component still played a larger role in the US.   Bull steepening on inflation data, but finally running into some resistance The bond rally in EUR rates found confirmation in the softer German and Spanish inflation estimates for November. They point to a larger-than-expected drop in today’s eurozone flash estimate. For the European Central Bank that means 2024 could bring a first rate cut. Whether this will be as early as the market currently prices remains questionable though. A first rate cut is close to being fully discounted now for April. Overall some 110bp in cuts are discounted for the year as a whole. The ECB’s Stournaras of Greece, one of the more dovish ECB members, told Politico yesterday that he thought markets betting on April were too optimistic in his view. But he did see a cut in mid-2024 as possible. Early rate cut hopes for now ignore the ECB’s more cautious approach to inflation having vastly underestimated price pressures in the past.    US rates stabilised with 10Y UST yields failing to move past the 4.26% mark, but the front end continued to slide lower with the 2Y yield coming close to touching 4.6%. It was only after hawkish comments from the Fed’s Barkin that rates moved higher when he argued it was premature to be talking about rate cuts. The market still begs to disagree and already discounts a 50% probability for a cut in March and more than fully prices a cut in May. US markets discount 117bp in cuts over 2024.   Dissecting the past month's rally in rates When decomposing the rally of nominal OIS rates since their peak on 19 October into their real and inflation components we find confirmation that the reassessment of inflation has been the main driver of the EUR market, especially at the front end. That should give ECB officials some comfort as the market is rallying for the right reasons, even if the central bank is more cautious on inflation. In the US inflation expectations have come down notably as well, but the real interest rate component has played a larger role in driving nominal rates lower, especially at the long end where the market had previously been more concerned about the high US deficits.   The inflation reassessment has played a bigger role in EUR markets than in the US   Today's events and market view Today’s session will still be all about inflation. In the eurozone markets are eyeing the flash CPI for November. The consensus is for a 2.7% year-on-year reading for the headline after 2.9% in October. But following the German and Spanish inflation data yesterday, the actual figure could come in lower. Core is expected at 3.9% after 4.2% last month. We will also be watching ECB commentary. The usually very dovish Panetta speaks for the first time in his role as the head of the Bank of Italy today. Bundesbank’s Nagel is scheduled to speak early in the evening, but we have heard from him already earlier this week. In the US the focus is on the PCE data, the Fed’s favoured inflation measure. Here the market is looking for a 3.0% year-on-year figure for the headline and 3.5% for the core. We will also get initial jobless claims data, which markets have been relying to a greater degree on lately to gauge the temperature in the jobs market.

The Commodities Feed: OPEC+ day OPEC+ is scheduled to meet today and there is growing noise around deeper cuts. The group will want to avoid disappointing the market given high expectations. Energy - OPEC+ uncertainty All eyes are on OPEC+. The group is set to meet later today to discuss output policy for 2024. There are growing expectations that they could make deeper supply cuts, which would be in addition to the rollover of the voluntary cuts from Saudi Arabia and Russia. Clearly, this growing expectation leaves downside risk for the market if OPEC+ disappoint later today. Adding to the uncertainty from the meeting is that it is still not clear if the group has been able to resolve a disagreement over Angolan and Nigerian production targets for next year. However, for now, the market appears focused on the potential for deeper cuts with ICE Brent rallying 1.74% yesterday to settle above US$83/bbl- the highest close since early November. The market ignored what was a relatively bearish inventory report from the EIA. US commercial crude oil inventories increased by 1.61MMbbls over the week to 449.7MMbbls. The market had been expecting a small draw. The build comes despite US net exports of crude and products hitting an all-time high of 4.45MMbbls/d last week. Refinery utilisation rates increased by 2.1pp to 81.8% as refiners returned from maintenance season. Higher refinery run rates and weaker implied demand over the week meant that product inventories also increased. Gasoline stocks grew by 1.76MMbbls, while distillate stocks increased by 5.22MMbbls. This is the first weekly build in distillate inventories since late September. Although with stocks at just under 111MMbbls, they are still at their lowest levels since 2013 for this time of year.   Agriculture – Brazilian sugar output estimates raised In its monthly report, Brazil’s agriculture agency, CONAB, now expects sugar cane production in Brazil to reach 677.6mt in 2023/24 following favourable weather conditions, up from its previous estimate of 653mt and also higher than the 610.8mt in 2022/23. As a result, sugar output estimates were revised up to 46.9mt for 2023/24, compared to a previous estimate of 40.9mt. In 2022/23, Brazilian sugar output totalled 36.8mt.

German inflation drops further in November The disinflation trend in Germany has gained more momentum in November and brings the European Central Bank's target closer in sight. Some very late satisfaction for ‘team transitory’ as German inflation continued its disinflationary trend in November. According to the flash estimate, headline inflation came in at 3.2% year-on-year, from 3.8% YoY in October. The European inflation measure came in at 2.3% YoY, from 3.0% in October. Disinflationary process to enter second stage A year ago, inflation was still at double-digit levels. And while falling inflation is not the same as actually falling prices, the disinflationary process is remarkable. In November, as much as in previous months, the main drivers behind falling inflation rates were favourable base effects across almost all sectors of the economy as well as actually falling energy prices and price cuts in leisure, entertainment and hospitality services. The only worrisome development was the monthly increase in food prices. Looking ahead, the disinflationary process should continue. In fact, this year’s drop in headline inflation has mainly been the result of base effects. The next stage of disinflation will be driven by the ECB’s monetary policy tightening. The weakening of demand as a result of higher interest rates should lead to actual price drops in the coming months. This is already reflected in selling price expectations which have started to come down significantly in the services sector, following the earlier trend in manufacturing. As a result, German headline inflation should drop further in December and settle down in the 2% to 3% range in 2024 Admittedly, the risks to this inflation forecast are obvious; it is not only energy prices but also the recent fiscal woes in Germany, which could push inflation up again. In particular, the fiscal woes could lead to upward pressure on prices. A reversal of the lowered VAT rate for restaurants, from 7% back to 19%, was already announced, pushing up headline inflation by some 0.1 percentage points. Further tax increases or increases in administered prices could follow, in order to close the government’s funding gap. Also, we never tire of repeating our long-held view that, structurally, inflation will be higher over the coming years than pre-pandemic. Demographics, derisking and decarbonisation all argue in favour of upward pressure on price levels.   How the ECB's last mile could become a walk in the park As disinflation is not only a German phenomenon but widely spread across the entire eurozone, the ECB runs the risk of underestimating the disinflationary momentum as much as it underestimated the inflationary momentum two years ago. With a weakening economic outlook and disinflation, rate hikes should be off the table at the December meeting. Given that the full impact of the tightening so far will still unfold in the coming months, the risk is even high that the ECB has already tightened too much. For now, and definitely for the December meeting, the ECB will still try to avoid mentioning or even, to use Christine Lagarde’s words, ‘pronounce’ rate cuts. Instead, the ECB will try to influence market expectations by warning about the ‘difficult last mile’. However, the ECB has not yet answered the question of where this last mile is leading, which is actual inflation rates consistently at 2.0% or inflation expectations and inflation forecasts at around 2%. While we agree that the former won’t be easy, the latter could almost become a walk in the park.

Mixed signals from Italian confidence data in November Initial signs of improvement among consumers and manufacturers and continued weakness in services and construction point to a continuation of the economic soft patch in the fourth quarter.   Consumer confidence improves after four consecutive declines Consumer confidence picked up on the month to 103.6 (from 101.6 in October), interrupting a streak of four consecutive declines. The improvement in the subcomponents is broad-based, encompassing the judgement on the current and future economic situation, the opportunity to save and to purchase durable goods. Only the expectation on future unemployment posted a modest deterioration. The resilience in the labour market and the deceleration in inflation are likely helping households to protect their balance sheet. The improvement in retailers’ confidence, admittedly driven by the sales expectation component, and not by current sales, seems to fit the picture.   Manufacturers slightly more upbeat in November after a long negative streak Confidence also slightly improved to 96.6 (from 96.1 in October) among manufacturers after posting seven consecutive declines. Here, the improvement was driven by improving expectations on production, reflecting slightly softer inventories rather than improving orders. The current production indicator remains under pressure, though.   Confidence down in construction, driven by residential builders The decline in construction confidence to 161.3 (from 163.8 in October) was driven by a sharp fall in the residential building component, possibly reflecting the ongoing phasing out of the generous tax incentives. The accelerating improvement in the specialised works component, however, could well gather pace in the investment part of the recovery and resilience plan.   Further deterioration in services The decline in services confidence continued in November, with the index down to 96.4 (from 98), building on soft readings in transport and storage and in tourism. The latter provides additional evidence that the reopening effect is indeed tailing off All in all, today's release points to a continuation of the economic soft patch over the last quarter of 2023. Manufacturing remains weak and the softening confidence in both construction and services highlights the risk of a slightly negative reading for GDP growth in the quarter, which is our new base case. For a gradual improvement in the Italian economic picture, we will likely have to wait for the second quarter of 2024.

Eurozone inflation is on track towards 2% while sentiment remains sluggish The increase in economic sentiment does not bring much relief but confirms a picture of a mildly contracting economy. Inflation data is coming in low for November and while some concerns about services inflation expectations remain, sluggish demand is set to keep it on track towards 2%. The Economic Sentiment Indicator for the eurozone ticked up slightly from 93.5 to 93.8. While at sluggish levels, most sectors saw small improvements in sentiment. Industry was the exception. New orders continue to weaken and while production observed in recent months was a bit better, expectations are falling again. For services, recent demand improved but expectations of demand in coming months remain weak. Overall, this is in line with an economy mildly contracting in the current and coming quarter. At the same time, employment expectations dropped again in November, indicating that the labour market is turning. We think that small employment losses may be on the cards for the coming quarters. Consumer inflation expectations dropped again in November, which also holds true for selling price expectations for goods. In retail, selling price expectations also dropped again in November, but overall services saw an increase again. While the latter can be considered worrisome to hawks on the European Central Bank's governing council, we do want to emphasise that sectors selling most directly to the consumer saw a modest decline again in inflation expectations. Incoming inflation data continues to be very encouraging. The Spanish and German regional inflation data for November so far points to a larger-than-expected drop in eurozone inflation. That data will be out tomorrow, and could be another surprise to the downside. Overall, inflation looks to be benign in the eurozone with weak demand and supply-side pressures remaining mild. For the ECB, this confirms the view that next year could bring about a first rate cut. With inflation trending down better than expected, this could happen earlier than expected.

Asia Morning Bites Thursday's data calendar is loaded with China reporting PMI figures, India's 3Q23 GDP plus the BoK decision on policy.   Global macro and markets Global markets:  Tuesday’s bond market rally continued on into Wednesday. 2Y Treasury yields fell a further 8.9bp to 4.645%, while the yield on 10Y Treasuries fell 6.5bp to 4.255%. Such a big move in a relatively short time argues for a correction at some point. There is still a little further for this bond rally to run before it hits overbought territory…not much though. EURUSD hasn’t taken any support from this latest bond move and has drifted back from 1.10 to 1.0973. The AUD has also lost ground, dropping to 0.6619 after yesterday’s low inflation print. Cable has dropped back just below the 1.27 level it breached earlier. The JPY is looking the strongest of the G-10, and has moved erratically lower to 147.07. Most of the Asia pack gained against the USD yesterday. The VND was weaker, perhaps a response to the new higher corporate tax rates announced. Leading the charge for the rest of the region were the TWD, MYR and THB with the KRW shortly behind. USDCNY is now 7.1262 after a small gain on the day. G-7 macro:  Germany delivered some very benign preliminary inflation data for November. The Harmonised CPI index fell 0.7% MoM,  and took the inflation rate to just 2.3% YoY, within spitting distance of the 2% target, and surely raising thoughts about ECB Rate cuts next year if the rest of the Eurozone follows suit. No wonder EURUSD didn’t move higher yesterday. The second revision of US GDP delivered the 5.0% annualised rate of growth expected by all. Today, we have already had the US Fed’s Beige book, where the newswire headlines have focused on some pullback by consumers on discretionary spending and some softening of labour markets. PCE inflation data later today will be the main focus and should follow the downward path indicated by the earlier CPI release. Core PCE inflation for October is expected to decline from 3.7% to 3.5% YoY. China: Official PMI data due out this morning will likely show a slight increase in activity from October’s readings of 49.5 for manufacturing and 50.6 for non-manufacturing. This would be in line with the gradual pickup trend suggested by recent activity data releases. India:  Later tonight, we get the GDP release for 3Q23. The consensus is looking for a 6.8% YoY increase, a slowdown from 7.8% in 2Q23, and reflecting the disappointing September production data. We think we may still get something above 7% and are looking for a 7.1% increase. NE Asia: Industrial production data from Northeast Asia was quite mixed. Disappointing Korean Industrial Production (IP) vs Solid Japan IP. Clearly car production remained solid, and we still believe that the global semiconductor cycle is slowly improving. Korea’s semiconductor output plunged temporarily but Japan’s chip-making equipment and electronic devices output gained. Japan: Industrial production rose more than expected 1.0% MoM sa in October (vs 0.5% in September, 0.8% market consensus), for a second month. Car production continued to grow in October, thanks to an easing chip shortage and healthy global demand, even as a shortage of some auto parts halted Toyota factories for more than a week in October. Thus, we believe the underlying trend should be stronger than what October figures suggested. Other than cars, electronic devices (including chip-making equipment) and general machinery gained as well, which suggests that global semiconductor demand is slowly picking up. However, retail sales unexpectedly dropped by 1.6% MoM sa in October (vs 0.4% in September, 0.4% market consensus). This month’s sharp drop is a concern as the decline was across almost all subsectors. But it’s the first slide in four months, so we are keeping our view on a consumption recovery unchanged for now. South Korea: It is widely expected that the Bank of Korea will keep its policy rate unchanged at today’s meeting. Given today’s poor outcome in monthly activity data, we believe there might be more concern about a sharp economic slowdown, but still, there shouldn’t be a dissenting vote yet, because that could trigger rapid market pricing on rate cuts which the BoK will not want just yet. Currently, the BoK is more concerned about the rapid increase in household debt, which is considered a major economic risk factor. Industrial production unexpectedly dropped by 3.5% MoM sa in October (vs revised 1.7% in September, 0.4% market consensus). Semiconductors (-11.4%) and machinery (-8.3%) declined the most while electronics (10.4%) and vehicles (3.2%) gained modestly. The semiconductor plunge is probably a technical payback from the double-digit increase in the past two months. (13.5% in Aug, 12.9% in Sep) gains from the previous two months. Putting the latest soft and hard data together, we expect the current quarter GDP to decelerate considerably (0.1% QoQ sa vs 0.6% in 3Q23), mainly due to weak private consumption and investment. For manufacturing and exports, we still think they will improve modestly in the current quarter despite the disappointing October manufacturing output. We still believe that the October plunge in semiconductors is due to the industry taking a breath and that solid car production will continue.  What to look out for: China PMI and the BoK meeting South Korea industrial production and BoK meeting (30 November) Japan retail sales and industrial production (30 November) China PMI manufacturing and non-manufacturing (30 November) India GDP (30 November)  US initial jobless claims and personal spending (30 November) US pending home sales (30 November) Japan jobless rate and job-applicant ratio (1 December) South Korea trade balance (1 December) Regional PMI (1 December) China Caixin PMI (1 December) Indonesia CPI inflation (1 December) US ISM manufacturing (1 December)

What companies and investors should know about COP28 COP28 will focus on ramping up efforts and investment in climate mitigation, adaptation and loss and damage control. It's now crucial that companies and investors invest in clean technologies, harness climate finance opportunities and contribute to systems change. Moving forward, they can expect more policy support – but also more policy dilemmas. COP déjà vu? Do you remember the first COP meeting held in Berlin in 1995? We don’t, so we won’t blame you either. We definitely remember the epic 2015 meeting, however, when the Paris Climate Agreement was signed. It was this meeting that put climate change on the agenda of corporate decision-makers and investors. So, what can they find out from this year’s meeting in Dubai?  COP28 puts the climate challenge in the spotlight once again The fight against climate change consists of three pillars. Climate mitigation, or bending the global emissions curve towards net zero emissions by 2050, is the first pillar and first priority as global warming continues as long as the concentration of carbon dioxide in the atmosphere increases. So, mitigation policies to reach the Paris Climate Goals will be a central theme for this year's COP as a warning against insufficient ambition and a call to close the cap.   Averting, minimising and addressing loss and damage from climate change Indicative yearly costs for mitigation, adaptation and loss and damage up to 2030   Climate change adaptation Adaptation to climate change is the second pillar and is all about minimising climate costs from extreme weather events such as droughts, floods, storms and tropical cyclones. Countries in the global south are expected to be severely impacted, and the 2023 UN Climate Adaption Report expects adaptation costs for developing countries to be around $400bn per year up to 2030.   Even if these mitigation and adaptation policies get financed and are able to materialise, the world will experience loss and damage from climate change – which for developing countries are of equal size as the adaptation costs. So, addressing the loss and damage from climate change is the third pillar of the fight against climate change.  Policymakers, corporate leaders and investors are likely to leave COP28 with the task of increasing investment in low-carbon technologies. Think of more renewables in the power sector, carbon capture and storage in industrial clusters, energy efficiency measures in housing, manufacturing and transportation, and the growth of the hydrogen economy. They will also leave COP28 with the task of speeding up climate-friendly behaviour. This could include increasing recycling rates, sharing cars, getting more people in trains and on bicycles as their primary way of transport, and even encouraging them to eat less meat. Both technology and behavioural changes are crucial in averting loss and damage from climate change and will require about $5,500bn in investment per year globally up to 2030, according to Bloomberg New Energy Finance. The $400bn annual damage and loss from climate change by 2030 in developing countries represents about 1% of the size of their economies. This number increases to 2-3% by 2100 if global warming is limited to 1.5 degrees Celsius, which seems a manageable cost. However, this number increases to 10-15% if global warming reaches 2.5-3.0 degrees Celsius by 2100 (the current pathway for global warming). Not only is this a large economic loss, but it also requires profound changes in the economy as similar amounts of spending on healthcare or education need to go towards restoring loss and damage from climate change. Not as a one-off, but year after year – and this is a conservative estimate as it does not include the costs of climate tipping points that could accelerate global warming. It also only focuses on CO2 emissions, not a loss of biodiversity or other forms of pollution.  So, we can safely say that the cost of inaction is extremely significant and that there's a high payoff of mitigation policies for society. Climate scientists point out that every dollar invested in mitigation and adaptation policies yields $1.5 to $4 in terms of less damage and loss from climate change.    Can companies and investors harness opportunities from COP's climate finance targets? In 2009 at COP15 in Copenhagen, developed countries set a target of providing $100bn per year by 2020 to help developing countries combat climate change. That target has already been missed. Despite an increase in the pace of capital mobilisation, a recent OECD report suggests that by 2021, developed countries were still about $10bn short of the target. While the same report also estimates that the $100bn target is likely to be met between the end of 2022 and 2023, there has clearly been a delay in offering assistance to developing countries.   Target of $100bn in climate finance for developing countries by 2020 was not met Climate finance mobilised and provided by developed countries for developing countries in 2016-2021 in billion dollars per year   Given the size of the challenge and slow progress – as well as new targets entering the picture – climate finance will feature prominently at COP28 too. A key outcome of last year’s COP27 is that developed countries agreed to form a new fund to specifically help developing countries cope with the loss and damage of climate change. But as the amount, form, and timeframe of this fund are undecided, there could be a few years before the money starts coming in for developing countries. There also remains the big question of whether developed countries will reach the (now undecided) target on time. These climate finance targets may seem to only concern governments from developed countries. However, they can also provide opportunities for the private sector. Alongside a recognition of the need for a higher level of private-sector involvement in climate financing in developing countries, there are also calls for governments and international institutions (such as multilateral banks) to support, incentivise and de-risk projects in those countries. Supporting mechanisms include loan guarantees, risk insurance and syndicated loans. From the private sector perspective, companies and investors would benefit from building new businesses in developing countries, as well as harnessing opportunities for new technologies. This would also enhance a ‘just transition’ as they would be working to reduce emissions not only in their home countries but also in developing states.  However, this is easier said than done. Companies and investors that hold a more international view of pursuing projects in emerging economies may run up against the current geopolitical discourse. So, discussions on risk mitigation strategies from the tense geopolitical landscape and those on climate support and opportunities in developing countries will feature prominently in boardrooms. As a result, companies and investors need to think about how to better balance the opportunities, risks, and potential resistance. Governments and international institutions need to provide consistent policy and support to minimise uncertainty which would slow down climate finance progress.     COP28 is about mitigation and adaptation, but companies and investors have a broader view COP’s main focuses are centred on preventing climate change (mitigation), adapting to climate change (adaptation), and dealing with the negative impacts of climate change (loss and damage). But there’s still more to be done. The footprint of companies and investors needs to stay within the planetary boundaries, which is broader than reducing CO2 and protecting from global warming. According to the Stockholm Resilience Centre, planetary boundaries refer to the limitations within which human activities need to stay to ensure the Earth can maintain the stability and resilience of operation. The centre has pointed out that six of the nine planetary boundaries – including climate change, biodiversity loss, freshwater, and novel entities, e.g., plastics pollution – have already been breached as of 2023. This means that the Earth may have already permanently lost the ability to self-regulate and operate in these areas. And that action is needed to operate within the planetary boundaries again.   Currently, six out of nine planetary boundaries have been crossed The concept of nine planetary boundaries within which humanity can continue to develop and thrive for generations to come   Many companies and investors are already actively tackling some of these problems beyond the core factors of climate change. For instance, petrochemical companies and their corporate customers down the supply chain are advancing plastics recycling technologies to tackle climate pollution. There has also been a surge in efforts from the private sector investing in preserving biodiversity. If carried out correctly, they can go hand in hand with the goal of reducing CO2 emissions. In order to effectively address the different planetary impacts of global warming more comprehensively, we need to see a significant step up in these efforts. Finally, there needs to be a closer, more critical look at ESG from both the private sector and the government. Climate disclosure policies are being developed in various jurisdictions, with a harmonisation of standards on the horizon. More transparency will incentivise corporates to act, but climate disclosure policies will only be effective if they are supported by government policies facilitating changes to the real economy to stay within the planetary boundaries. This means that companies need to better understand how they can best align their own strategies with relevant government policies.   The fossil fuel debate continues at COP28 The run-up to COP meetings is often far from cheerful – and this year is no exception, with the UN publishing the global stocktake report which clearly shows that much more needs to be done to reduce global emissions. The phasing out of fossil fuels in general – and coal in particular – will feature prominently at COP28. As will efforts to reduce methane emissions and stop deforestation, two other sources of greenhouse gasses. On the fossil fuel front, we expect more guidance on the topic of unabated versus abated fossil fuels. This could have important consequences for the design of transition pathways for sectors and individual companies. Carbon capture and storage (CCS) could gain more traction if the importance of unabated fossil fuels is stressed, particularly for hard-to-abate activities like cement, steel, plastic and fuel production. Green technologies that reduce fossil fuel use or aim to phase it out completely will feature more prominently if COP28 takes a more negative stance on both unabated and abated fossil fuels and stresses the need to phase out fossil fuels.   COP28 to trigger discussion about progress on green technologies... So far, progress on green technologies has been mixed over the past two years. Progress on solar panels, electric vehicles, batteries and heat pumps was more or less in line with scenarios for a net zero economy, although the pressure is on to accelerate towards 2030 and beyond.   But progress on energy efficiency, electrification, wind turbines, CCS, green hydrogen and nuclear power is not on track. Technologies for increasing energy efficiency are proven and mature; they just need to be implemented at a higher pace. Companies and investors should expect a lot more policies on that front if policymakers are serious about fighting climate change. The same applies to wind energy – although the sector is suffering from tough market conditions, so policymakers need to step in if they want to speed up the rollout of wind farms.   Other technologies such as large-scale electrification (think of industrial heat pumps), green hydrogen, and recycling technologies are often less mature but are much needed to green the energy-intensive sectors. Companies and investors need to invest in R&D and pilot projects so that these emerging technologies can be scaled up faster, and policymakers can provide support if they intend on following through with the greening of hard-to-abate sectors. Think of sustainable aviation fuels in shipping and aviation or increased recycling and green hydrogen use in steel and plastics production.    Important technology and policy milestones towards a net zero economy IEA’s milestones in its’ updated 'net zero scenario'   ...and system change In addition to speeding up green technologies, the private sector also needs to think about decarbonisation from a systemic perspective. Currently, they tend to only focus on investing in clean technologies that make existing production less carbon-intensive. While greentech solutions are much needed, their impact is often significantly lowered by rebound effects. The electrification of light-duty vehicles, for example, goes hand in hand with the production of larger and heavier cars that are less energy-efficient. The greening of homes often encourages people to increase their comfort levels, as it's easy to turn the thermostat a little higher when the energy bill is lowered with better insulation. This is why the transition towards a net zero economy requires system changes that go beyond technical solutions. For example, companies can promote environmentally friendly behaviour and implement accompanying supporting policies. The topic of system change has not featured prominently on the COP agenda yet, but we’ll expect more calls for it as governments, companies and investors try to close the emissions gap.   Low expectations for a smooth and linear transition In the long term, companies and investors should expect policies to support new technologies and system change. But in the short to medium term, there are possibilities of policy uncertainties and even detours, depending on jurisdictions. Europe is a pioneer in climate policymaking and has the highest level of policy consistency. However, there could be discussions about whether the region’s targets are too ambitious, especially given the many challenges in terms of labour shortages, congestion in power grids and long permitting procedures. And there might be a backlash when parties on the right wing of the political spectrum win elections, as we have seen recently in Italy and the Netherlands. The picture in the US is far more mixed, where administration changes could continue to result in a back-and-forth on climate policy. Thus, companies and investors need to be prepared for policy disruptions and set up more resilient long-term strategies if they are serious about staying within the planetary boundaries. In Asia (where there's a large percentage of developing countries) we would continue to expect pushback on climate target setting, with arguments that these economies still need fossil fuels (abated or unabated) to power economic development. In Asia, corporates and investors can expect a dual track of development with fast renewables adoption but continued reliance on fossil fuels.   Companies to become key players in closing the global warming gap Despite increased efforts, there is still a huge gap between what is needed and what has been done to keep global warming within a 1.5 degrees Celsius increase. The consequences of climate change – including extreme weather conditions and related health and migration challenges – will become more evident in the coming years, fuelling the debate on mitigation and adaptation policies and measures to cope with loss and damage. Governments are the main players at COP, but companies and investors also have a significant role to play. We expect more companies at COP28 than last year – a trend that is likely to continue at future COP meetings.    

CEE: Quiet first half of the week The first half of the week basically has nothing to offer in the region. We will see the first interesting data on Thursday. In Poland, November inflation will be published, where we expect a slight increase from 6.6% to 6.7% YoY, slightly above market expectations. Poland's second estimate of third-quarter GDP will also be released, which will offer a breakdown. We expect a confirmation at 0.4% YoY. On Friday, we will see the same GDP numbers in Hungary and the Czech Republic and also PMI in the region. The Czech Republic will also release budget numbers, and Moody's will publish a rating review of Poland. We don't expect any changes, but it will be interesting to see the assessment of the political and fiscal situation after the elections.  The zloty did not move much last week despite confirmation of an economic recovery. However, the short end of the rate curve is gradually moving up as we expected, which we think should push EUR/PLN down. Of course, the long positioning of the market is good to keep in mind here and will likely be an issue for faster PLN appreciation. These days, we see EUR/PLN below 4.360.  The koruna strengthened last week after a surprise paying flow and maybe some hints of hawkishness from the Czech National Bank (CNB). However, we believe that weak economic data and more mixed CNB views will bring back the rate-cutting discussion and that market rates will go down again. The first signal was already visible on Friday, and rates are thus pointing to a weaker koruna back above 24.450 EUR/CZK.  The forint rebounded last week after the National Bank of Hungary (NBH) meeting but still failed to hold new gains. We think EUR/HUF should go down from these levels, but we need to see new triggers. Last week, we saw positive headlines from the EU money story – and we may see more this week, which would certainly help. Rates also bounced up after the central bank meeting. Overall, we are positive on the HUF and expect levels below 380 EUR/HUF in the coming days. 

GBP: Fiscal divergence Sterling has been performing a little better of late, no doubt buoyed by the better global risk environment. We do also think that the fiscal story has helped, where the UK government plans to put £20bn to work in the economy, while countries like Germany remain hamstrung by its constitutional court. At the same time, the slightly better November PMI readings have supported sterling too.  These developments have left investors looking for just 40-50bp of Bank of England (BoE) easing next year – clearly less than what is expected of the Fed or of the ECB. The UK data calendar is light this week, but we do have several BoE speakers. Governor Andrew Bailey already seems to be playing around with language on forward guidance, where restrictive monetary policy will be retained for an 'extended period'  or, most recently, 'for quite some time'. All in all, we feel that EUR/GBP could correct a little further and a close under 0.8660 could unlock 0.8630 or even 0.8600 this week.

EUR: Orderly inflation outcome EUR/USD remains well bid, but should struggle to better resistance at 1.0965/1000 this week. As mentioned above, we think the dollar sell-off may not have legs since the short end of the US rates curve is still pretty firm. From the eurozone side, this week's data highlight will be flash CPI for November set to be released on Thursday. Here, further disinflation is expected in both headline and core readings, bringing year-on-year rates back to 2.7% and 3.9%, respectively. These readings might tend to support the 70bp of the European Central Bank (ECB) easing priced into eurozone money markets next year.   Additionally, expect investors to keep one eye on fiscal developments in Germany. It is unclear from where a political solution will emerge and will do little to discourage views of a stagnant eurozone economy in early 2024. Overall, we favour EUR/USD correcting to the 1.0825/50 area this week.  EUR: Orderly inflation outcome EUR/USD remains well bid, but should struggle to better resistance at 1.0965/1000 this week. As mentioned above, we think the dollar sell-off may not have legs since the short end of the US rates curve is still pretty firm. From the eurozone side, this week's data highlight will be flash CPI for November set to be released on Thursday. Here, further disinflation is expected in both headline and core readings, bringing year-on-year rates back to 2.7% and 3.9%, respectively. These readings might tend to support the 70bp of the European Central Bank (ECB) easing priced into eurozone money markets next year.   Additionally, expect investors to keep one eye on fiscal developments in Germany. It is unclear from where a political solution will emerge and will do little to discourage views of a stagnant eurozone economy in early 2024. Overall, we favour EUR/USD correcting to the 1.0825/50 area this week. 

FX Daily: Don’t chase the dollar bear trend At the start of a quiet week for data, the dollar is hovering near recent lows. However, we do not think this is yet the start of the big, cyclical turn lower in the dollar we expect for next year. Instead, falling volatility and firm short-dated US yields can probably see the dollar hold onto current levels. Highlights this week include OPEC+ and key speakers. USD: Too soon The DXY dollar index is down around 3.5% from its highs seen in October. The drop looks largely down to the view that the Federal Reserve's tightening cycle is over and that portfolio capital can now be put back to work in bonds, equities, and emerging markets. While acknowledging that November and December are seasonally soft months for the dollar, our view is that this dollar sell-off has come a little early. We are bearish on the dollar through 2024 but expect the core driver to be a bullish steepening of the US Treasury curve – which has not happened yet. Indeed, US two-year Treasury yields remain firm near 5%. We thus urge caution in chasing this dollar decline much further. In terms of what this week has to offer, we pick out three themes: the Fed, OPEC+ and US data. Fed communication this week will come from the release of the Fed's Beige book and also some key speakers, including Fed Chair Jay Powell, on Friday. Remember that the Beige Book paints a picture of the economy to prepare the FOMC for its meeting on 13 December. It certainly is not clear that the Beige Book will paint a soft enough picture to support the 80bp of fed easing already priced for next year.  In terms of the OPEC+ meeting, our commodities team believe that the Saudis will extend their voluntary supply cut and that the oil market can find some support - a mild dollar positive. In terms of US data, the highlight should be some stable (0.2% MoM) core PCE inflation data for October and the ISM Manufacturing data on Friday.  Thursday's US inflation data is probably the largest bearish risk to the dollar this week. However, with cross-market volatility falling, it seems investors are once again interested in carry trade strategies. We have seen this theme several times this year already, and it is not a dollar negative. It is a negative for the funding currencies like the Japanese yen and the Chinese renminbi. Until we get some clear dovish communication from the Fed or US data is materially weak enough, we think this dollar drop might have come far enough for the time being and suspect that the 103.00/103.50 support area could well hold the DXY this week.

Asia Morning Bites China profits data for October to dominate Asian macro releases on an otherwise quiet day.   Global macro and markets Global markets: US Treasuries ended the week with yields rising again. The yield on the 2Y Treasury rose 4.9bp, while the 10Y yield went up 6.2bp to 4.466%, taking it close to the 4.50% line again. The USD was softer again on Friday. EURUSD rose to 1.0943. The AUD has tested the 0.6590 level before settling down to around 0.6584. Sterling has broached 1.26 for the first time since September. But the JPY is still hovering below 1.50 and hasn’t gained as much as its other G-10 peers. Other Asian FX was mostly softer on Friday and will likely catch up with the G-10 moves this morning. The weaker currencies, KRW, THB, and TWD will probably outperform the others. The CNY is little changed at 7.1490. US equities did very little on a low trading volume day as many market participants dragged the Thanksgiving holiday over to the weekend. US equity futures are looking a bit negative today. Chinese markets were down on Friday, possibly reflecting unease after a criminal probe was launched into the financial conglomerate, Zhongzhi, though most of the weakness in the CSI 300 came from the info-tech part of the index, along with consumer discretionary stocks and industrials. Financials were down 0.44% on the day. G-7 macro: Friday’s very meagre offerings on the macro front don’t offer much new insight. The S&P PMI indices for the US rose fractionally for manufacturing but remained just in contraction territory at 49.9. The service sector PMI was stronger at 50.3, but down from the October 50.8 reading, and takes the composite PMI down to just 50.4. There isn’t enough history for this series to draw any meaningful conclusions from this. Today, we just get US new home sales for October. The US housing market has been doing surprisingly well, but the market is looking for a small 4.7% MoM decline this month – mainly a statistical pullback from the very robust September figure. China: Industrial profits data for October come out today. This is expected to show the contraction in earnings abating slightly, in line with some of the slightly stronger PMI and activity figures. The September figure was a -9.0%YoY ytd decline. Figures around the -6.7% mark have been cited as the consensus forecast. What to look out for: China Industrial Profits and US new home sales China industrial profits (27 November) Thailand trade (27 November) US new home sales (27 November) Australia retail sales (28 November) Taiwan GDP (28 November) US Conference board consumer confidence (28 November) South Korea business survey (29 November) US GDP, personal consumption, wholesale inventories (29 November) US Fed Beige book (30 November) South Korea industrial production and BoK meeting (30 November) Japan retail sales and industrial production (30 November) China PMI manufacturing and non-manufacturing (30 November) US initial jobless claims and personal spending (30 November) US pending home sales (30 November) Japan jobless rate and job-applicant ratio (1 December) South Korea trade balance (1 December) Regional PMI (1 December) China Caixin PMI (1 December) Indonesia CPI inflation (1 December) US ISM manufacturing (1 December)

Agriculture– Solid Ukrainian grain harvest Recent numbers from Ukraine’s Agriculture Ministry show that the domestic grain harvest so far this season rose 38% YoY to 55.5mt as of 24 November. This is largely driven by a bumper corn harvest, which rose 84% YoY to 24.9mt. Meanwhile, the wheat harvest increased by 16% YoY to 22.5mt, while soybean harvests stood at 4.8mt, compared to 3.6mt a year ago. While acreage for grains is lower this season, it is more than offset by stronger yields.

The Commodities Feed: OPEC+ week Sentiment remains fairly negative in the oil market, given the ongoing dispute within OPEC+ over production quotas. However, there are reports of progress ahead of the group’s meeting on Thursday. Energy - OPEC+ makes progress Sentiment in the oil market remains negative. ICE Brent settled a little more than 1% lower on Friday, which means that Brent has seen 5 consecutive weeks of closing lower. The delayed OPEC+ meeting takes place this Thursday, and instead of being held in person in Vienna, the meeting will be remote. Reports suggest that the group is making progress in coming to a deal with Angola and Nigeria, who are not happy with their lower 2024 production targets. Whilst Angola is producing below its target for next year, Nigeria is currently producing above its 2024 target. Expectations are that Saudi Arabia will at least roll over its additional voluntary cut of 1MMbbls/d into next year. Clearly, if we do not see this, it would put further downward pressure on the market, given the surplus over 1Q24. We believe that the Saudis will roll over this cut and there is a growing possibility that we see a deeper cut from the broader group. In doing this, the group would provide good support to the market going into 2024.

  US core PCE Deflator (Oct) – 30/11 – when the October CPI numbers were released a couple of weeks ago and saw headline CPI slow to 3.2%, and core prices slow from 4.2% to 4.1%, bets on another Fed rate hike in December were pared back sharply.   What was particularly noteworthy was a similar slowdown in super core inflation which the Fed pays close attention to and could well translate into a similar slowdown in this week's core PCE deflator numbers.If we see a similar trend playout in the core PCE deflator numbers that we saw in the headline CPI and PPI numbers, then it will become increasingly difficult for Fed officials to push back on the idea that rate cuts are coming in the middle part of next year. In September PCE core deflator slowed to 3.7% its lowest level in 2 years and this week's October numbers are expected to slow further to 3.5%. This is likely to be the Fed's next key challenge in the face of slowing inflation, that is reining in market expectations of rate cuts and reinforcing the higher for longer mantra that has tightened financial conditions this past few months.      

  US core PCE Deflator (Oct) – 30/11 – when the October CPI numbers were released a couple of weeks ago and saw headline CPI slow to 3.2%, and core prices slow from 4.2% to 4.1%, bets on another Fed rate hike in December were pared back sharply.   What was particularly noteworthy was a similar slowdown in super core inflation which the Fed pays close attention to and could well translate into a similar slowdown in this week's core PCE deflator numbers.If we see a similar trend playout in the core PCE deflator numbers that we saw in the headline CPI and PPI numbers, then it will become increasingly difficult for Fed officials to push back on the idea that rate cuts are coming in the middle part of next year. In September PCE core deflator slowed to 3.7% its lowest level in 2 years and this week's October numbers are expected to slow further to 3.5%. This is likely to be the Fed's next key challenge in the face of slowing inflation, that is reining in market expectations of rate cuts and reinforcing the higher for longer mantra that has tightened financial conditions this past few months.      

Hungary’s labour market cools slight The cost of living crisis has not gone completely unnoticed in employment statistics, with labour metrics cooling slightly in the autumn. However, the labour market still remains tight, which also puts upward pressure on wage growth.   There has been a slight increase in the unemployment rate According to the latest unemployment statistics published by the Hungarian Central Statistical Office (HCSO), there was little change in the labour market in October. The model estimate for the tenth month of the year showed a slight deterioration in the unemployment rate (4.1%). Meanwhile, the official three-month moving average of this labour metric (based on a survey) rose by a similar 0.2ppt to 4.3%. Against this backdrop, the number of people out of work has once again risen meaningfully above 200,000, a level not seen since March 2021. Looking at the longer-term trend, the cost of living crisis has not gone completely unnoticed in the labour market. Apart from a (seasonal) improvement this summer, there has been a slow, trend-like deterioration in the unemployment rate since spring 2022. However, it is important to note that both the activity rate and the employment rate in the labour market have increased significantly over the same period. In other words, more and more people want to work as a result of the impact of the crisis on their livelihoods, and they have been absorbed to a significant extent, but not entirely, by the labour market.   Historical trends in the Hungarian labour market (%, 3m moving average) Looking at the monthly data, perhaps the most important change is that the number of people in employment rose by around 10,000, while the number of people unemployed rose by 11,000 and the number of people without a job by just under 2,000. On the one hand, these changes are within the margin of error, i.e. they are not significant. On the other hand, they suggest that more people are entering the labour market as the year draws to a close, but that finding a job is not as easy as it was a year ago. Compared to the beginning of 2023, there has been a significant increase in the proportion of people who have been unemployed for 0-3 months (i.e. either recently lost their job or recently returned to the job search), although there has also been an increase in the number of long-term unemployed who have been out of work for more than a year. The hiring propensity of companies thus appears to be easing significantly in the overall economy. Nevertheless, considering the cost of living crisis, we can conclude that the Hungarian labour market remains in good shape and labour shortages remain significant.   Unemployment by job search duration   Going forward, we do not calculate for any structural changes in the labour market for the rest of the year. The vast majority of companies will continue to insist on retaining staff, having learned from the shocks of recent years that it is quite difficult to expand the workforce in a recovery period in an economy with a structural shortage of labour. In this regard, judging by the latest third-quarter GDP data, the Hungarian economy is on the verge of recovery. The structural labour shortage can raise workers’ bargaining power and therefore support wage increases, especially in light of the recent minimum wage agreement. Positive real wages may support the economic recovery, but they also carry reflationary risks. For the time being, we believe that the corporate costs of the expected real wage increase can be covered by expected revenue growth and efficiency gains, so that while the risk of a price-wage spiral remains, we see a good chance that it can be avoided.   Slowdown in average gross earnings on the back of base effects According to the latest wage statistics published by the HCSO, the pace of year-on-year (YoY) average wage growth in Hungary slowed slightly in September. On the one hand, the 14.1% YoY average wage growth (for the full range of employers) can still be considered very strong. On the other, the slowdown in wage dynamics compared with the pace observed in recent months is due to a strong base