Chair Powell is appearing in a moderated discussion later today

Markets

Yesterday’s shock decision by South Korean president Yoon of the conservative People Power Party to declare martial law spiced up an otherwise uneventful trading session. Yoon backtracked after parliament voted unanimously against. The opposition, which holds a majority, moved to impeach Yoon with a vote possible as soon as this Friday. Yoon’s exit is all but certain. It’s unclear yet what it means for SK (geo)politics and its economy but investor confidence in the country was severely violated. The central bank already pledged to offer all the liquidity needed. The SK won tanked to USD/KRW 1444 from the low 1400 area before returning to 1411 in trading this morning. Stock markets underperform Asian peers (-2%). US Treasuries yesterday attracted safe haven flows during the chaos but finished with losses anyway. A sharper than expected uptick in US job openings to 7.74mln helped yields rising up to 4 bps at the long end of the curve. We’ve been looking for that part to show some bottoming out after the correction over the past few days. The economic calendar today could support the process with the release of the US services ISM. The expected 55.7 would be in line with October’s 56 and is testament of a solid US consumer and economy and thus a strong dollar. The ADP job report ahead of Friday’s payrolls report is forecasted at a 150k employment increase. Front end yields remain more vulnerable since a December rate cut by the Fed is still not fully priced in. Chair Powell is appearing in a moderated discussion later today and will be closely watched for some clues. The German curve bear flattened with net daily changes varying between 4.2 bps (2-yr) to 0.6 bps (30-yr). It’s been the first gain for the likes of the 10-yr (+2 bps) in 10 (!) trading days. We’re wary to call it the start of a bottoming out yet but it may be a first sign. Pressure meanwhile in Germany is rising to lift the debt brake. Bundesbank president Nagel in the Financial Times calling on Berlin to soften the spending rules is telling. ECB chair Lagarde appears before the European Parliament today. It’s her last opportunity to shape market expectations for the December policy meeting before the blackout period kicks in. A 25 bps rate cut is all but certain but the market refuses to let the idea of a 50 bps move completely go (15% chance priced in currently). Market expectations for a 1.75% terminal rate in our view are too aggressive. Bank of England governor Bailey is also in the picture today. Markets are rightly so expecting nothing from the central bank at least until the February meeting. Bailey swapped his activist approach for a guarded stance after the Labour Budget was released and higher-than-expected October CPI is all the reason to stick to it. We’re keeping a close eye on France as well today. Parliament will vote on a motion of no confidence in late afternoon (> 16:00). We expect the government to fall as a result, plunging the country into another episode of political chaos. The topic may continue to weigh on the euro.

News and views

Australian GDP in Q3 grew at a lower than expected 0.3% Q/Q and 0.8% Y/Y according to data published by the Australian Bureau of Statistics (ABS). Growth was mainly driven by public sector expenditures. Public investment rose 6.3 in the September quarter, albeit coming after three quarterly falls. Government spending rose 1.4%, including social benefits paid to households and energy cost relief rebates. Household spending was flat, coming after a 0.3% decline in the June quarter even as the poor Q3 performance was affected by statistical issues related to the energy relief measures. Net trade contributed 0.1% ppt to growth as exports grew 0.2% and imports declined 0.3%. There was a 0.4% negative contribution from inventories. Meagre economic growth is fueling the debate whether there is room for the RBA to cut policy rates earlier than wat was anticipated until now. Money markets now fully discount a 25 bps cut at the April meeting. The 3-y Australian government bond yield declines 8 bps this morning. The Aussie dollar from the 0.6485 area to currently trade near 0.644.

The Czech government yesterday approved the 2025 budget bill which includes a continuation of the fiscal consolidation. The budget deficit will be reduced further to CZK 241bln from a CZK 282bln target this year. The new budget should reduce the deficit below 3.0%. KBC expects the government budget balance to decline further from a deficit of 2.8% this year to 2.1% next year. The center right ruling party is facing elections next year with the opposition party of former PM Babis aiming to raise public spending to revive the economy.

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