Core inflation will never have been higher

Markets

Financial markets yesterday retraced a small part of Friday’s heavy moves as initial doom scenarios on the new Covid-variant’ transmissibility and vaccine-beating and symptom intensifying characteristics didn’t materialize over the weekend. Main European equity indices gained 0.5% to 1%, but closed off best intraday levels. The US Dow Jones put up a similar performance with the S&P (+1.3) and Nasdaq (+1.9%) outperforming. The US yield curve steepened with daily yields changes ranging between -2.4 bps (3-yr) and +3.6 bps (20-yr). German yields added 0.1 bp to 1.9 bps with the belly of the curve underperforming the wings. Spanish, Belgian and German November CPI data all accelerated further and suggest yet again upside risks to today’s EMU number. Consensus expects a record high 4.5% Y/Y for the headline outcome and an acceleration from 2% Y/Y to 2.3% Y/Y for the core measure. Apart from a brief spell early 2022, core inflation will never have been higher. EUR/USD closed at 1.1291 yesterday from a 1.1318 open while EUR/GBP ended flat at 0.8481.

This morning’s Asian session had a lot of yesterday’s trading dynamics in Europe and the US up until the final hour. The Financial Times published an interview with Moderna chief Bancel who expects a “material drop” ineffectiveness of current Covid-vaccines against the Omicron-variant. Bancel’s comments mark a contrast with more optimistic ones from Pfizer officials and other health institutions. He did side with them in confirming that it will take around two weeks to have hard evidence on current vaccines’ performance against Omicron. The FT article triggered a new risk-off market reaction. Asian stock markets turned gains into losses of up to 2%, erasing earlier positivism around Chinese PMI’s (see below). Core bonds profit with the US 10-yr yield at risk of losing the uptrend line since early August (<1.5%). The German 10-yr yield is expected to open near/below key support of -0.35%. The hierarchy amongst FX majors remains the same: JPY-EUR-USD-GBP. EUR/USD approaches Friday’s high of 1.1325 while EUR/GBP tries to take out the 0.85 big figure. Brent crude faces a new setback, falling from around $75/b towards $70/b. We continue to advise to err on the side of caution with respect to the developing Omicron story. This morning’s FT headline clearly proved some remaining sensitivity to the issue although market moves are already smaller in absolute terms. Today’s EMU CPI print has the potential to give the single currency some additional intraday support while balancing the drop in yields. The US eco calendar is back-loaded with ISM’s and labour market data to be released between tomorrow and Friday.

News headlines

The Chinese Manufacturing PMI returned in to growth territory in November, rebounding from 49.2 to 50.1. It was the first rise in three months. Activity got some relief as power rationing eased and as prices from some raw materials dropped significantly. Output returned above the 50 thresholds, while orders declined at a slower pace. Both the indices for input prices and prices charged declined sharply. The non-manufacturing PMI eased slightly from 52.4 to 52.3. Construction rebounded to a three-month high, rising from 56.9 to 59.1. Activity was boosted by a pick-up in infrastructure projects. Activity in the services sector eased, mainly due to a slowdown in social-distance sensitive services. The yuan trade strong this morning in the 6.3750 area, nearing the Mid-November low.

Fed Chair Powel said that “the recent rise in Covid-19 cases and the emergence of the omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation.” The virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply chain disruptions. In his remarks, Powell didn’t bring any specific guidance on changing the pace of tapering the Fed’s asset purchases. In her part of the testimony, Treasury Secretary Yellen remained confident that the economy stays strong. She reiterated her call for the Senate to approve Biden’s Build Back Better plan and urged lawmakers to raise the debt limit as the Treasury could run out of cash potentially after 15 December. 

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