European yields react: Poor French data sparks ECB rate cut speculation

Markets

Poor French growth and inflation data published at the start of European dealings caused European interest rate markets to try a new leg on recent bull run. Yields across the European/German curve touched new cycle correction lows. The EMU flash CPI estimate at ‐0.5% M/M and 2.4% Y/Y (headline) and 3.6% Y/Y (core) beat consensus estimates by a big margin. However, this was no real surprise given earlier releases of national data. For sure, the subsequent price action, especially in European interest rate markets, didn’t look like a genuine exhaustion move yet. Especially yields at the short‐end continue to price an ever growing chance of an early ECB rate cut next year (25 bps in April fully discounted). Still, yields tentatively started looking for a bottom. German yields at the end of the day changed between ‐2 bps (2‐y) and +1.5 bps (10‐y). In the US, the highly awaited October PCE deflators (headline 0% M/M and 3% Y/Y, core 0.2% M/M and 3.5% Y/Y) and the weekly jobless claims (218k) were too close to expectations to trigger further bond gains. The MNI Chicago PMI even delivered a big upside surprise (55.8 from 44.0) with solid details. The market reaction was limited, but it helped US yields to maintain intraday gains. US yields closed between 3.5 bps (2‐y) and 7.2 bps (10‐y) higher. Divergence both in data and in interest rates between EMU and the US, triggered hefty profit taking on the recent EUR/USD rally. The pair closed at 1.0888 (compared to a 1.0967 close on Wednesday). The move mirrored both euro weakness and USD resilience. DXY closed at 103.5 (open 102.79). USD/JPY regained the 148 big figure (close 148.2). Sterling showed some erratic swings intraday. The BoE Chief Financial Officers survey showed UK business leaders expect inflation to hold above 3% over the next three years. UK gilts underperformed. Sterling continued outperforming the euro with EU/GBP close at 0.8625, nearing the October correction low.

Asian equities mostly trade slightly in the red this morning. US treasuries are going nowhere. The dollar eases slightly after yesterday’s rally. After mostly disappointing data of late, the China Caixin Manufacturing PMI unexpectedly returned into positive growth territory (50.7 from 49.5). Later today, there are no important data in Europe. In the US, the Manufacturing ISM is taking center stage. A slight improvement from 46.7 to 47.8 is expected. Of late, markets were mostly driven by (perceived) soft/negative data release. After yesterday’s surprise jump in the Chicago PMI, maybe we now should look at the market reaction function in case of an unexpected strong figure. Will better than expected data finally help a bottoming out process in yields? If so, it might also support the downside in the dollar. In this respect, EUR/USD dropped out of an ST upward trend channel starting begin November. Next support is coming in at 1.0825/26 (Mid November correction low/38% retracement ST). Comments by Fed Chair Powell at Spelman College are a wildcard. It’s unclear if he’ll touch on monetary policy at the final occasion ahead of the blackout period in the run‐up to the December 13 policy meeting.

News and views

The OPEC+ meeting, originally scheduled for Nov 26 in Vienna but delayed because of diverging views and replaced by online discussions, ended yesterday with a commitment by Saudi Arabia to extend its voluntary production cuts of 1 mn barrels/day through the first quarter. Additionally, member states including Russia, the UAE, Kuwait and Iraq pledged voluntary cuts as well in Q1 2024 totaling a combined 1.2 mn barrels/day. Oil prices rallied in the runup to the decision and fell back afterwards, from $84.5/b to $80.5/b. Apart from the anticipation effect, the vague wording and non‐unanimous commitment in the OPEC statement created doubt and uncertainty on actual output levels in coming months.

Hungarian Cabinet Minister Gulyas yesterday announced an extension of interest rate caps on household mortgages and on corporate loans for SME’s. They were first introduced early October in a reaction to the high MNB policy rate. Gulyas said that MNB rates are coming down but are still very high (11.5%). The interest rate cap on new loans for households at 8.5% will be extended until July 1. The cap on new loans for businesses at 12% will be prolonged until April 1.

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