The Dollar outperforms but gains are not impressive given the divergence in the interest rate markets

Markets

First releases of EMU November CPI in several EMU members states fueled the debate whether or not EMU inflation has reached its peak. Spanish headline inflation dropped faster than expected (HICP -0.5% M/M and 6.6% Y/Y, from 7.1% Y/Y). Belgian CPI showed a similar picture (-0.23% M/M to 10.63% Y/Y, from 12,27%). However, in both cases core inflation continued to rise. German regional inflation data suggested a substantial slowdown, but in the end, the harmonized measure only eased to 0.0% M/M and 11.3% Y/Y (from 11,6%), a result very close to expectations. German yields initially dropped about 15 bps at the short end of the curve and 10+ bps for longer maturities, but part of this decline was recouped later. In a (modest) steepening move, German yields closed between 8.7 bps (2-y) and 7 bps (10/30-y) lower. Despite persistent high underlying inflation, markets discount a >80% probability for the ECB to shift to a 50 bps rate hike instead of 75 bps. US yield initially were dragged lower in lockstep with Europe, but changed course in US dealings, rising between 3.5 bps (2-y) and 8 bps (30-y). Markets apparently considered that the US bond rally had gone far enough given recent persistent hawkish Fed speak (continue hiking in 2023 and rates to stay higher for longer). US consumer confidence was close to expectations and didn’t add much to the debate. The dollar slightly outperformed (DXY close 106.82; EUR/USD 1.033 from 1.034 on Monday), but gains again were not impressive given divergence in the interest rate markets (and a higher US real rate). US equities closed between unchanged (Dow) and 0.59% lower (Nasdaq).

Asian markets show a mixed picture this morning, with small losses for mainland China and Japan, while most other regional indices are trading in positive territory. At least for now, investors don’t draw any further conclusions about the impact to the (new?) China Covid policy. Chinese PMI disappointed but with little market impact (see infra). US yields and the dollar are ceding modest ground. (EUR/USD 1.0345; USD/JPY 138,5).

The first estimate of the EMU November CPI will be published today. An easing to 0.2% M/M and 10.4% Y/Y (from 1.5% and 10.6% ) is expected. Core inflation is seen unchanged at 5%. Stubbornly higher core inflation probably leaves little room of a further dovish market positioning. In the US, the ADP job report (200k), JOLTS job openings and Chicago PMI are interesting, but the market focus is on Fed Powell’s speech later this evening. We expect him to reconfirm that demand remains strong and the labour market tight, supporting the case for the Fed to raise rates further and keep them at an elevated level for longer. His comments in theory could support a bottoming out process after recent setback both in US yields and the dollar.

News headlines

Australian October inflation eased unexpectedly from 7.3% to 6.9% y/y, missing the bar for a further acceleration to 7.6%. The trimmed mean inflation, excluding the 15% tails of the CPI component distribution, eased from 5.4% to 5.3% vs the 5.7% expected. Increased fruit & vegetables supplies and eased costs of holiday travel & accommodation helped to cool down the October number. Housing (20.4% y/y) and fuel costs (11.8%) still keep inflation at elevated levels. Australian swap yields decline between 6.9-8.2 bps across the curve. Money markets are further paring bets for even a 25 bps rate RBA hike next week. Instead they currently assume a 15 bps move that would bring the policy rate from 2.85% to a more “standard” level of 3%. The impact on the Australian dollar, if any, was only temporary. AUD/USD ekes out small gains on the back of a slightly weaker USD. The pair is trading around the 0.67 big figure.

Official Chinese November PMI’s disappointed. The manufacturing gauge fell from 49.2 to 48. Non-manufacturing PMI ventured two points deeper in contraction territory at 46.7, bringing the composite indicator to 47.1 – the lowest since April’s Shanghai lockdown. Both output and demand weakened, again due to Covid and the strict measures to contain it. While China is exploring ways to live with the virus without a zero-Covid strategy, a recovery in sentiment and economy will probably only be very gradually. The government and the central bank recently offered more support (property stimulus package and lower RRR). China’s yuan this morning trades a tad stronger against an overall weaker USD. USD/CNY nudges lower from 7.157 to 7.144.

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