UK bond market concerned about stagflation, shrinking space for fiscal manoeuvres by Chancellor

EU mid-market update: Hawkish US ISM data lifts treasuries; UK bond market concerned about stagflation, shrinking space for fiscal manoeuvres by Chancellor.

Notes/observations

- European indices are cautiously higher despite hawkish US data, with some strategists becoming more bullish on European equities due to the Eurozone inflation aligning with ECB forecasts, keeping 100 bps of rate cuts on the table for 2025.

- German economic data showed disappointing factory orders and retail sales, alongside a decline in French consumer confidence. In the UK, the rise in Gilt yields is under scrutiny for being possibly overdone, with potential implications for fiscal policy.

- Strong US ISM services data and JOLTS jobs numbers yesterday have led to a reassessment of Federal Reserve rate cut expectations, with markets now pricing in fewer and later cuts. This has pushed US Treasury yields to an eight-month high. US dollar strengthened after the economic data, impacting the onshore Yuan which hit its lowest since September 2024.

- China/HK markets continued to struggle, with the Hang Seng at a three-month low following an underwhelming policy announcement on trade-in programs. Conversely, the ASX 200 in Australia reversed early losses after softer-than-expected CPI data, suggesting a delay in RBA rate cuts to May. Japan's Nikkei followed the US market's lead downwards, though the Kospi in South Korea showed resilience.

- Quantum-related names trade sharply down pre-market after Nvidia’s CEO Huang stated “if you kind of said 15 years for very useful quantum computers, that'd probably be on the early side”. Huang's words about Samsung certification for HBM also helped chip names in Asia, despite Samsung's underwhelming pre-announcement of Q4 results.

- Looking ahead, investors are eyeing up Fed’s December meeting minutes for further clarity on rate cut timing, alongside key US employment data releases like ADP payrolls and jobless claims, potentially setting the tone for trade direction today.

- Reminder: Tomorrow is a US adhoc national holiday, following the death of Ex-Pres Jimmy Carter.

- Asia closed mixed with KOSPI outperforming +1.2%. EU indices are +0.2-0.3%. US futures are +0.2-0.3%. Gold +0.2%, DXY +0.2%; Commodity: Brent +0.9%, WTI +1.2%; Crypto: BTC -6.0%, ETH -8.4%.

Asia

- Australia Nov CPI Y/Y: 2.3% v 2.2%e.

- Australia Nov Job Vacancies Q/Q: +4.2% v -5.6% prior.

- South Korea Nov Current Account Balance: $9.3B v $9.8B prior.

- New Zealand Dec ANZ Commodity Price Index M/M: 0.2% v 2.9% prior.

- PBOC, MOF and NDRC joint announcement on trade-in program ‘upgrades’ was short on specifics and failed to impress.

- China newspaper saw a "chance for ‘forceful’ monetary policy moves".

Global conflict/tensions

- President-elect Trump said to refuse to rule out the use of military force to take control of Greenland and the Panama Canal. Warned also ‘all hell will break out’ if Gaza hostages were not released by his inauguration.

Europe

- UK Chancellor of the Exchequer (Fin Min) Reeves said to be facing a £6.4B blow from rising gilt yields. Reeves ‘on verge of breaking her own fiscal rules’ as borrowing costs surge. Chancellor has a cushion of just £1B left before she faces a “nasty choice” between more tax rises, spending cuts (**Reminder: UK 30-year Gilt Yield was at its highest level since 1998).

Energy

- Weekly API Crude Oil Inventories: -4.0M v -1.4M prior.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 +0.25% at 515.94, FTSE +0.11% at 8,254.72, DAX +0.23% at 20,396.86, CAC-40 -0.01% at 7,488.25, IBEX-35 +0.28% at 11,845.00, FTSE MIB +0.56% at 35,135.00, SMI +0.62% at 11,898.50, S&P 500 Futures +0.25%].

Market focal points/key themes: European indices open mixed but took on a decidedly positive bias through the early part of trading; improved performance attributed to expectations of continued monetary policy easing as inflation sticks to forecasts; among sectors leading the way higher are financials and communication services; lagging sectors include consumer discretionary and industrials; Galapagos to split into two companies; Banca Ifis launches offer for Illimity Bank; focus on ADP jobs numbers and FOMC minutes later in the day; among earnings expected in the upcoming US session include Greenbrier and Radius.

Equities

- Consumer discretionary: LVMH [MC.FR] -0.5% (China NDRC, MOF, PBOC briefing on consumer goods trade-in program), InterContinental Hotels Group [IHG.UK] -1.0% (Morgan Stanley cuts to underweight), Trigano [TRI.FR] -5.0% (Q1 results).

- Energy: Orsted [ORSTED.DK] -5.0%, Siemens Energy [ENR.DE] -4.0% (Trump said to seek to prevent the construction of wind farms during his second term; Kepler Cheuvreux cuts to hold), Shell [SHEL.UK] -1.5% (cuts Q4 production guidance).

- Healthcare: Galapagos [GLPG.BE] +4.5% (intends to separate into 2 publicly traded entities) - Industrials: Rheinmetall [RHM.DE] +2.5%, BAE Systems [BA.UK] +1.0% (Trump call for higher defense spending) - Technology: TeamViewer [TMV.DE] +12.0% (raises FY24 guidance), STMicroelectronics [STM.FR] -1.5% (Samsung preannouncement) - Telecom: Nokia [NOKIA.FI] +0.5% (Nordea raised to buy).

Speakers

- Japan Econ Min Akazawa noted that if BOJ managed to stabilize inflation around 2% then could achieve wage growth that exceeded inflation; Reiterated govt stance that would leave specifics of monetary policy to BOJ.

- France Foreign Min Barrot stated that EU would not let other nations attack its sovereign borders.

Currencies/fixed income

- Session continued to see a stronger USD with focus on the upcoming Fed minutes later today and US jobs report on Friday. Market betting that Fed is on pause on easing with cut being pushed down the road. Speculation that Jun would be the timing for the next cut. Fed likely to continue to err on the cautious side with sentiment partly influenced by policy uncertainties from the new US administration and the most recent economic releases.

- EUR/USD at 1.0320 by mid-session as dealers largely dismissed the recent higher inflation readings in Europe. The uptick in EU CPI being attributed to base effects.

- USD/JPY at 158.10 by mid-session as higher US yield benefiting the greenback.

- CNY currency (Yuan) continued its downtrend. USD/CNY at 16-month highs as markets brace for a rapid tariff escalation after the January 20th Trump inauguration.

Economic data

- (NL) Netherlands Nov Consumer Spending Y/Y: 0.8% v 0.8% prior.

- (ZA) South Africa Dec Net Reserves: $60.4B v $60.6B prior; Gross Reserves: $65.5B v $65.9B prior.

- (DE) Germany Nov Factory Orders M/M: -5.4% v -0.2%e; Y/Y: -1.7% v +3.0%e.

- (DE) Germany Nov Retail Sales M/M: -0.6% v +0.5%e; Y/Y: 2.3% v 2.5%e.

- (SE) Sweden Dec Preliminary CPI M/M: 0.0% v 0.2%e; Y/Y: 0.8% v 1.0%e.

- (SE) Sweden Dec CPIF M/M: 0.3% v 0.4%e; Y/Y: 1.5% v 1.7%e.

- (SE) Sweden Dec CPIF (ex-energy) M/M: 0.4% v 0.5%e; Y/Y: 2.1% v 2.2%e.

- (FI) Finland Nov Preliminary Trade Balance: +€0.1B v -€0.4B prior.

- (MY) Malaysia end-Dec Foreign Reserves: $116.2B v $118.1B prior.

- (FR) France Dec Consumer Confidence: 89 v 90e - (FR) France Nov Trade Balance: -€7.1B v -€7.5B prior; Current Account Balance: -€1.7B v -€1.9B prior.

- (IS) Iceland Dec Preliminary Trade Balance (ISK): -46.7B v -31.6B prior.

- (ZA) South Africa Dec Manufacturing PMI: 46.2 v 48.1 prior (2nd month of contraction).

- (EU) Euro Zone Dec Economic Confidence: 93.7 v 95.6e; Industrial Confidence: -14.1 v -11.6e; Services Confidence: 5.9 v 5.7e; Consumer Confidence (final): -14.5 v -14.5 prelim.

- (EU) Euro Zone Nov PPI M/M: 1.6% v 1.5%e; Y/Y: -1.2% v -1.4%e.

Fixed income issuance

- (IN) India sold total INR280B vs. INR280B indicated in 3-month, 6-month and 12-month bills.

- (EU) European Investment Bank (EIB) opened book to sell new EUR-denominated 10-year bond via syndication; guidance seen +47bps to mid-swaps.

- (DK) Denmark sold total DKK2.35B in 2026 and 2033 DGB bonds.

- (SE) Sweden sold total SEK10.0B vs. SEK10.0B indicated n 3-month and 6-month bills.

- (NO) Norway sold total NOK3.0B vs. NOK3.0B indicated in 2027 and 2033 bonds.

- (UK) DMO sells £4.25B in new 4.365% Mar 2030 Gilts; Avg Yield: 4.490% v 4.348% prior, bid-to-cover: 3.00x v 2.90x prior; Tails: 0.5bps v 0.8bps prior.

Looking ahead

- 05:25 (EU) Daily ECB Liquidity Stats.

- 05:30 (CH) Switzerland to sell 2035 and 2045 Bonds.

- 05:30 (DE) Germany to sell €5.0B in new 2.50% Dec 2035 Bunds.

- 06:00 (IE) Ireland Dec Unemployment Rate: No est v 4.1% prior.

- 06:00 (CL) Chile Dec CPI M/M: 0.0%e v 0.2% prior; Y/Y: 4.7%e v 4.2% prior.

- 06:00 (EU) EU Commission to sell combined €4.5B in 3-month, 6-month and 12-month Bills.

- 06:30 (CL) Chile Central Bank Traders Survey.

- 07:00 (US) MBA Mortgage Applications w/e Jan 3rd: No est v -12.6% prior.

- 07:00 (BR) Brazil Nov Industrial Production M/M: -0.7%e v -0.2% prior; Y/Y: 1.4%e v 5.8% prior.

- 07:00 (MX) Mexico Dec Vehicle Production: No est v 351.5K prior.

- 07:00 (UK) Weekly PM Question time in House.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:15 (US) Dec ADP Employment Change: +140Ke v +146K prior.

- 08:30 (US) Initial Jobless Claims: 215Ke v 211K prior; Continuing Claims: 1.86Me v 1.844M prior.

- 08:30 (US) Fed’s Waller.

- 09:30 (TR) Turkey Dec Cash Budget Balance (TRY): No est v -62.2B prior.

- 10:30 (US) Weekly DOE Oil Inventories.

- 11:30 (US) Treasury to sell 17-Week Bills.

- 12:30 (US) Weekly EIA Natural Gas Inventories.

- 12:30 (FR) ECB’s Villeroy (France).

- 13:00 (US) Treasury to sell 30-Year Bond Reopening.

- 14:00 (US) FOMC Meeting Minutes.

- 14:00 (AR) Argentina Nov Industrial Production Y/Y: No est v -2.0% prior.

- 15:00 (US) Nov Consumer Credit: $12.0Be v $19.2B prior.

- 18:30 (JP) Japan Nov Labor Cash Earnings Y/Y: 2.7%e v 2.2% prior (revised from 2.6%); Real Cash Earnings Y/Y: -0.6%e v -0.4% prior (revised from 0.0%); Cash Earnings (same sample base) Y/Y: 2.8%e v 2.8% prior(revised from 2.7%); Scheduled Full-Time Pay (same sample base) Y/Y: 2.8%e v 2.9% prior(revised from 2.8%).

- 19:01 (UK) Dec BRC Shop Price Index Y/Y: -0.4%e v -0.6% prior.

- 19:30 (AU) Australia Nov Retail Sales M/M: 1.0%e v 0.6% prior.

- 19:30 (AU) Australia Nov Trade Balance (A$): 5.5Be v 6.0B prior; Exports M/M: No est v +3.6% prior; Imports M/M: No est v +0.1% prior.

- 20:00 (PH) Philippines Nov Trade Balance: -$5.5Be v -$5.8B prior; Export Y/Y: -1.4%e v -5.5% prior; Imports Y/Y: 4.9%e v 11.2% prior.

- 20:30 (CN) China Dec CPI Y/Y: 0.1%e v 0.2% prior; PPI Y/Y: -2.4%e v -2.5% prior.

- 21:00 (JP) Japan Dec Tokyo Avg Office Vacancies: No est v 4.2% prior.

- 22:00 (ID) Indonesia Dec Consumer Confidence Index: No est v 125.9 prior.

- 22:30 (JP) Japan to sell 6-Month Bills.

- 22:35 (JP) Japan to sell 30-year JGB Bonds.