The US treasuries’ outperformance against German bunds didn’t help EUR/USD

Markets

US November payrolls cemented the case for a 25 bps rate cut by the Fed. That scenario wasn’t completely discounted (70%) ahead of the numbers. While headline payrolls growth rebounded to 227k (with an additional 56k upward revision to September & October figures), the accompanying household survey made a more grim reading. With a 193k decline in the workforce, a 355k decline in employment, a rise in the unemployment rate from 4.1% to 4.2% and a decline in the participation rate from 62.6% to 62.5%. US Treasuries spiked lower on the headline number, but rapidly looked higher. The move topped out after the release of December University of Michigan consumer confidence. A fifth consecutive increase brings the index at 74 (best since April) with details showing short term inflation expectations (1y) rising from 2.6% to 2.9% and ending the decline from 3.3% in May. Longer-term inflation expectations were broadly stable (3.1% from 3.2%). Fed governor Bowman, who dissented at the September meeting in favour of a smaller 25 bps rate cut, reiterated that she wants to proceed cautiously and gradually in lowering the policy rate as underlying inflation remains uncomfortably above the 2% target. She thinks that the neutral rate moved higher with the current policy rate not being restrictive. The US yield curve eventually bull steepened with yields losing up to 4 bps at the front end of the curve. The US Treasuries’ outperformance vs German Bunds (yields up to 2 bps lower) didn’t help EUR/USD. A brief uptick above 1.06 was rapidly undone with the pair closing at 1.0568. After market close, rating agency Fitch raised the outlook on the Hungarian BBB rating from negative to stable. They cite an easing of policy uncertainty, prudent monetary easing, a moderation of inflation, the balanced primary fiscal position, an improvement in the current account and a projected fall in debt as key reasons. At EUR/HUF 413.50, the forint remains weak.

The fall of Syrian president al-Assad’s government is omnipresent this morning. If any, it triggers some minor safe haven flows at the start of the trading week given uncertainty over how the power vacuum will be solved and what it will mean for the wider region. Both the dollar and US Treasuries eke out small gains. Today’s eco calendar is empty, suggesting that risk sentiment will continue dominating broader markets. The agenda turns more interesting later this week with US CPI numbers (Wednesday) and central bank meetings in Australia (tomorrow), Canada (Wednesday), Switzerland and EMU (both Thursday).

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Chinese consumer inflation unexpectedly eased from 0.3% to 0.2% y/y in November. Slowing food prices were among the key forces weighing down on the numbers. The 0.9% m/m increase came after a +/- 2% jump over the past few months which reflected the impact of heavy rain in the summer on food production. Core inflation picked up for a second month straight, be it to a very low 0.3% y/y still. Producer prices eased 2.5%, extending the deflation streak in place since October 2022. It was, however, a smaller drop than in October (-2.9%) and than expected (-2.8%). The inflation numbers suggest the range of stimulus measures have yet to show a significant impact on the economy. They raise the stakes for Wednesday’s Central Economic Work Conference. The meeting behind closed doors will be to discuss next year’s growth target, probably the same as 2024’s (+/- 5%) and additional stimulus measures to get it done. China’s yuan loses marginal ground this morning towards USD/CNY 7.28.

Rating agency Fitch said that the French government collapse threatens the country’s necessary fiscal consolidation efforts. It said the recently ousted Barnier’s 5% target for next year is now “very unlikely”. The developments also put serious question marks to France’s medium-term plan to reduce the deficit over an ECapproved 7-year term. Fitch now expects fiscal gaps above 5% to lead to a steep rise in government debt towards 118.5% of GDP by 2028, adding that the lack of a “credible medium-term fiscal consolidation plan that would lead to a stabilization of debt in the medium term is one of the main downgrade sensitivities for France’s ratings.” The rating agency recently lowered France’s growth forecasts from 1.2% to 0.9% and noted that slowing growth could hamper the fiscal tightening. While France faces no serious financing challenges, Fitch says, the political crisis has raised its borrowing costs. If permanently, these will further compound the challenges.

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