Eurozone inflation takes centre stage

Market movers today

In the euro area, flash HICP figures for November will be the market highlight. Country figures from Spain and Germany point to an easing of headline inflation from October's 10.6%, on the back of lower energy inflation. Signs of peaking underlying inflation are less clear-cut, but core inflation holding steady at 5.0% might be just enough for ECB to slow the hiking pace to 50bp in December.

In the US we get Chicago PMI, pending home sales and Fed chairman Powell will speak tonight on the economic outlook and the labour market.

China will release Caixin PMI manufacturing overnight which comes on the back of the official Chinese PMIs this morning falling short of expectations on both manufacturing and non-manufacturing.

The 60 second overview

Markets: It has been fairly quiet overnight with markets barely reacting to the set of weaker-than-expected official PMIs out of China. Instead focus remains on yesterday's more forward-looking news that the Chinese authorities are working on gradually easing its tough zero-Covid policy (see next). Major equity futures and bonds yields are roughly flat this morning and the USD is only marginally weaker. Also oil prices have stabilised overnight after a drop yesterday afternoon on speculations that OPEC+ might not cut back production after all later this week. In Australia inflation surprised to the downside leaving 2Y AUD swap rates close to 10bp lower while the AUD exchange rate was little changed.

China Covid-policy: China has reached a point where the economic and social costs have become too big and now outweigh the health costs from a gradual opening, which will lead to a rise in deaths. For markets, households and companies, what is important is that they can now see an end to the zero-Covid policy and an improvement of the economy on the other side of the short-term chaos that could arise from a sharp rise in the virus spreading. We still do not think we will see a full reopening until the warmer season over the summer and the elderly are fully vaccinated. But the conviction that China will leave the zero-Covid policy and pave the way for an economic rebound in H2 2023 has increased. A rebound where pent-up demand in consumption and the property sector is unleashed. We look for growth in 2024 to rebound to 5.3%.

50bp or 70bp December hike from Fed: Yesterday, the US Conference Board's survey signalled weakening consumer confidence and business outlook, but also rising inflation expectations and that strong labour market conditions continued into November. Today, focus turns to ADP and JOLTs data, as especially the latter has been a key forward-looking indicator for wage growth. Also Powell will be on the wires discussing the economic outlook and labour markets for the last time before the blackout period. In other words, a potentially very important occasion for him to guide markets.

This morning, we published an article reviewing the key arguments and data releases for determining Fed's hiking pace in the December meeting. While consensus is clearly in favour of a 50bp hike, we do not think a larger 75bp move is a zero-probability event, see Research US - 50 or 75bp? Fed's December Checklist, 30 November.

Equities were generally lower, and Nordic losses escalated into the US session. Hot inflation numbers, Chinese reopening and rising oil prices sent the US 10y back to 3.75%. As a result, defensives outperformed cyclicals and high multiple names suffered the most (Sinch -6%, Hexagon -2%). On the other hand, energy and materials companies outperformed (Boliden +4). S&P 500 -0.2% and Nordics -0.6%. US futures are higher this morning though.

FI: European rates markets recorded a strong rally of 10bp in the morning hours after the Spanish and regional Germany inflation prints came in lower than consensus expected. However, later the German headline figure was stronger than what was anticipated by markets, whereby half of the rally was reversed and core rates therefore ended only 6bp lower on the day. Italian bonds also caught a bid with the Italian-German spread now standing at 190bp.

As a result of the repricing of rates and lower headline inflation, the December ECB pricing is now just 56bp although today's underlying inflation print for the euro area will be important for that decision. On Monday, markets priced the Dec meeting as a coin toss for 50bp or 75bp. With the country releases for Germany, Spain and Belgium easing on the headline compared to October and core set to hold steady at 5.0% it might be just enough for ECB to slow the hiking pace to 50bp in two weeks' time.

FX: The antipodeans and NOK balanced between supporting commodities and risk off, while CAD underperformed within G10 which according to Bloomberg reports could be related to M&A flows. In yesterday's session EUR/SEK and EUR/NOK were slightly bid and EUR/USD slightly offered ahead of this week's major central bank event, Jerome Powell's speech at Brookings Institution 19:30 CET. If he comes across as hawkish it should weigh on equities, EUR/USD and Scandies alike.

Credit:  Overall the credit market had a relatively calm day with iTraxx main tightening 1bp to 91bp and Xover tightening 4bp to 459bp. However, under the surface two interesting stories unfolded:

1) Danish based Orsted issued a new EUR500m Green hybrid bond with very significant interest. In fact the order book was around EUR5bn - hence the issue was around 10x over-subscribed! The huge interest made it possible for Orsted to lower the final spread to 5.25% from the initial price talks of 5.875-6.0%. Clearly the corporate bond market has appetite for high quality issuers.

2) On the contrary some negative news hit the bond market as German real estate company Around Town announced that it had no intention to call its outstanding hybrid bond with first call in January 2023. Furthermore Around Town stated that it would consider its option to defer coupon payments as the company gets closer to the interest payment day. Later yesterday another real estate company Grand City Properties SA announced that it would not call its EUR200m hybrid bond with call date in January 2023. Naturally these statements had negative read-overs to the Nordic real estate bond segment - and especially for those real estate companies with outstanding hybrid bonds. To say the least it will be interesting to follow the news flow from the real estate companies in the coming weeks.