The Euro lost most of its upper hand against the USD when US investors began to join

Markets

Bonds suffered in a global bear steepening move yesterday. Bank of Japan’s Ueda was widely considered to have started the fire by giving a clear nod towards a December rate hike. At 0.75% (from 0.5% today), Ueda added, the BoJ would also indicate how far the normalization cycle could go. And by comparing another hike by lifting the foot of the accelerator rather than hitting the brakes, markets soon concluded that December wouldn’t be the final move, considering that inflation remains well above the 2% target. Japanese yields rose with the 2-yr yield topping 1% for the first time since 2008 and long(er) tenors either testing or hitting new (record) highs. Japanese yields are looking ever more attractive and increasingly offer an alternative to higher-yielding assets such as Treasuries. Along with the expected heavy corporate issuance this week (and month) it helps explain core bonds losing ground yesterday. US rates rallied between 4 bps (2-yr) to 7.3 bps (30-yr). The US money market segment (<1 year) grabs some attention with interbank rates such as the SOFR being fixed (on Friday) at rates well above the Fed’s upper bound target (4%). US banks yesterday at the same time drew a substantial amount from the Fed’s repo facility ($26 bln), indicating some kind of funding pressures going into the new month. German yields added 3.5-6.2 bps. The 10-yr European swap rate ended at a 1.5 year high, the 30-yr at a 2-yr (+) high. The Japanese yen unsurprisingly outperformed on FX markets but finished off the intraday highs. USD/JPY dropped as low as 154.67 before recovering to 155.46 into the close. The euro lost most of its upper hand against the USD when US investors began to join. EUR/USD pared earlier gains to 1.165 to around 1.161. Sterling slid to EUR/GBP 0.8786.

We’re keen to find out how yesterday’s opening moves to the week play out further. A solid 10-yr Japanese bond auction this morning for now eases the sell-off with Treasuries and Bunds steading too. Asian stock markets trade mixed, offering little guidance for the European open later (futures flat). The underling market dynamics in any case won’t be derailed by the economic calendar. Based on last week’s national releases, European inflation figures should more or less match the bar set at -0.3% m/m and 2.1% y/y for headline CPI. Core inflation is expected at 2.4%. Implications for the ECB are close to zero: president Lagarde just last week reiterated the current 2% is the correct level to have in place. Yesterday’s US manufacturing ISM barely made a dent in markets. It further slipped into contraction territory (48.2 from 48.7) with new orders and employment details unconvincing either. But markets are more interested in tomorrow’s services edition as well as other releases including the ADP job report and PCE deflators. The OECD’s new economic outlook is worth mentioning too.

News and views

The British Retail Consortium’s (BRC) shop price index showed prices falling for a second consecutive month. Overall prices fell by 0.1% M/M with lower food prices (-0.3% M/M) again responsible for the setback. Non-food prices were stable compared with October. On an annual level, it’s still the other way around. The overall 0.6% Y/Y increase (down from 1% in October) is due to higher food prices compared to November 2024 (+3% Y/Y vs +3.7% in October; slowest pace since May 2025). Non-food price deflation went from -0.4% Y/Y to -0.6%. BRC CEO Dickinson said that retailers are hoping that consumer confidence rebounds in this crucial trading period with Budget uncertainty behind us. After kicking off Black Friday deals earlier than expected, they will continue doing everything to keep prices down going into Christmas. 2026 looks less bright with headwinds including rising employment costs and consequences for both prices and consumer confidence.

Multiple officials confirmed that the ECB won’t provide a backstop for a €140bn loan (against frozen Russian central bank assets) to cover Ukraine’s 2026-2027 financing needs. The ECB concluded that the European Commission proposal violated its mandate (prohibiting monetary financing). The EC wanted EU countries to provide state guarantees to ensure the repayment risk of the loan is shared. The ECB would have a role as a lender of last resort to Euroclear bank to mitigate any liquidity risk. The EC is now looking for other solutions, but almost all of them include (a way of) joint EU debt issuance.

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