The relief-rally fades amid a rebound in rates

Market movers today

Today's US data is not the kind that usually moves markets a lot: industrial production, NAHB housing market index and Philly Fed index for November. On the latter, we saw a quite strong increase in the Empire index, but both Empire and Philly Fed are rather unreliable guides to the manufacturing PMI that we get next week.

We have speeches today from Fed's Mester and Williams, and from ECB's President Lagarde.

In Norway, the Q4 Expectations Survey will be important for Norges Bank (NB) in the current situation with a weakening NOK but all other inflation drivers are moving in the opposite direction. In the previous Expectations Survey, inflation expectations were rising across the board. Lower inflation and weaker GDP growth beyond the autumn have probably dampened inflation expectations, especially on 12-month and 2-year horizons.

The 60 second overview

Markets. After a string of sessions characterised by sharp declines in global real rates and a subsequent very strong risk appetite in markets risk sentiment has soured somewhat again over the last 18 hours. The culprits seem to be a combination of US data releases driving a rebound in US rates (see below) and weak Chinese house data overnight driving a sell-off in the big Chinese indices with some spill-over to Asian markets. The USD sell-off has stabilised and industrial metals have edged lower. Also oil has extended yesterday's decline on the back of both worse global risk appetite and the weekly US crude inventory report showing a larger-than-expected build in inventories.

Markets wrap. Yesterday' release of US data was a mixed bag. Overall data indicated a slowing economy and weaker price growth - yet the market reaction was to roll back expectations for US rate cuts next year. In short, both retail sales and not least Empire Manufacturing surprised to the topside while producer prices came in lower than expected. On US retail sales the headline figure printed at -0.1% m/m (cons.: -0.3%, prior: 0.9%). Excluding the volatile auto and gas sales, the retail sales control group revealed monthly growth of 0.2% m/m which was in line with expectations. Additionally, last month's retail sales control group was revised higher, from 0.6% to 0.7% which overall painted a picture of somewhat better goods buying from the US consumer in recent months than expected. On the other hand, the October PPI figures were weaker than expected, with the headline at -0.5% m/m (cons.: 0.1%, prior: 0.4%), while November Empire Manufacturing rose to 9.1 (cons.: -3.0, prior: -4.6), the highest reading since April.

In the euro area, industrial production declined slightly more than expected in September, at -1.1% (consensus: 1.0%, prior: 0.6%). Hence, the hard data continues to confirm the weakening in the soft indicators in the region.

US-China diplomatic relations. Chinese President Xi Jinping is currently meeting his US counterpart in Joe Biden in California. This is the first in-person meeting between the two presidents in a year and the initial remarks from both sides have been that the talks have been constructive. In particular the two country heads have agreed on resuming collaboration on military communication, drug trafficking prevention and on AI-progresses. Also the question on Taiwan was discussed with both parties explaining a wish to maintain peace. There has been no market reaction.

Equities: Equities continued higher yesterday but lost some steam during the afternoon. Yields continue to govern the direction of equities, and it was after yields began to rise that equities retreated. Europe rose a mild 0.4% and US 0.2%. Cyclicals beat defensives and value made a revenge vs growth. Staples and banks were in the top yesterday while utilities declined a little after the surge earlier this week. US futures are a tad lower this morning.

FI: US data releases drove global yields higher yesterday. UST yields ended the day up by 7-8bp across the curve, while the Bund curve bear steepened with the 10Y tenor rising 4bp. The 5y5y EUR inflation swap rate dropped to a new 6M low of 2.39% as prices on oil and European natural gas (TTF) fell throughout the day. Markets continue to price in close to 90bp worth of ECB cuts next year.

FX: Yesterday's session saw a slight reversal of the relief induced rallies to the cyclically sensitive currencies as NZD, AUD, NOK, SEK and the CEEs all traded on the back-foot. The USD decline has also stabilised with EUR/USD edging below the 1.0850 mark after having traded close to 1.09 yesterday morning.

Credit: Credit markets settled into calmer territory after the massive post-CPI rally on Tuesday. Itrax closed 0.5bp higher at 70.7bp, while Itrax Xover closed 2.1bp higher to close at 390.2bp. Primary markets were still fairly active with corporates and financials seeking to utilize the final couple of weeks of the pre-Xmas issuance window.