Today’s calendar centers around US payrolls and services ISM

KBC Market Research Desk KBC Bank

Markets

The November rally in core bonds continued yesterday, but unlike Wednesday they closed off the intraday highs. A dovish hold by the Bank of England and disappointing US Q3 unit labour costs (-0.8% Q/Q with upward revision to Q2 figure: 3.2% from 2.2%) called the shots. Equity markets rallied in lockstep with key European indices ending 1.5% to 2% higher and main US benchmarks recording equal gains. EUR/USD went from an open at 1.0570 to a close of 1.0622. Daily changes on the US yield curve ranged between +4.6 bps (2-yr) and -12.7 bps (30-yr). The US 2-yr yield tested the October low (4.92%), which is the neckline of a double top formation, but bounced off this mark. Similar support in the US 10-yr yield stands at 4.58% (vs 4.66% close yesterday). German yield differences varied between +2 bps (2-yr) and -6.9 bps (30-yr). The German 10-yr yield tested a same double top formation (with October low of 2.68% as neckline), but a break lower didn’t happen. UK Gilts outperformed with yields ending 6.2 bps (2-yr) to 11.6 bps (7-yr) lower as the belly outperformed the wings. The Bank of England’s split decision to hold rates instead of hiking was less tight than in September (5-4 vs 6-3) with the updated Monetary Policy Report barely showing growth across the policy horizon. Sterling initially weakened from EUR/GBP 0.8690 towards 0.8735, but closed near unchanged around 0.87. From a technical point of view, the pair fails to really make headway beyond 0.87-0.8750.

Today’s calendar centers around US payrolls and services ISM. Consensus expects 180k net job growth, a stable unemployment rate (3.8%), wage growth of 0.3% M/M & 4% Y/Y and the ISM ticking back from 53.6 to 53. In light of the recent bond correction, we see asymmetric risks with markets rallying (& dollar softening) on weaker or in-line data. A huge upward surprise for both is likely needed to send bonds and stocks lower again. First Fed governors are scheduled to speak after this week’s FOMC meeting (Barkin, Kashkari, Bostic) and serve as a wildcard. ECB Schnabel already said that the central bank can’t close the door for further rate hikes. “After a long period of high inflation, inflation expectations are fragile and renewed supply-side shocks can destabilize them, threatening medium-term price stability.” She added that it took a year to get inflation from 10.6% to 2.9% currently, but that the ECB expects it to take about twice as long to get back to 2% from here.

News and views

The Czech National Bank kept the policy rate unchanged at 7% yesterday in a 5 (hold) – 2 (cut) vote. Markets and analysts believed the central bank would have started the cutting cycle with a 25 bps move. The risk of unanchored inflation expectations persists, the CNB explained. “This risk could manifest itself in the results of the ongoing wage bargaining process and in stronger-than-expected repricing of goods and services at the start of next year.” Price pressures indeed eased dramatically but remain too high. Especially core inflation is cause for concern, with the outlook for 2024 at an average of 3%. The decision was made even as economic growth was cut. It’s overshadowing a weakening economy, which unexpectedly contracted in Q3. The CNB expects -0.4% this year before returning to growth of around 1.2% next year. The central bank added that the depreciation of the koruna delivered a slight easing of overall monetary conditions. It added to the case of keeping rates as they are. The Bank Board did discuss a strategy for a future reduction in rates and assumes that any decrease will initially be moderate and gradual. Since its internal models project a 50 bps cut by end this year, “the interest rate path will therefore most probably be higher than in the baseline scenario of the forecast in the coming quarters.” KBC Economics expects a 25 bps rate cut (to 6.75%) in December, though risks are tilted towards an even later easing start. The Czech crown rallied after the hawkish policy outcome. EUR/CZK dropped from 24.66 to 25.45. Czech swap yields disconnected from the global and local trend yesterday by adding 10 bps at the short end of the curve.

Download The Full Sunrise Market Commentary

Author

KBC Market Research Desk

KBC Bank

EUR/USD trims gains, hovers around 1.1900 post-US data

EUR/USD trades slightly on the back foot around the 1.1900 region in a context dominated by the resurgence of some buying interest around the US Dollar on turnaround Tuesday. Looking at the US docket, Retail Sales disappointed expectations in December, while the ADP 4-Week Average came in at 6.5K.

GBP/USD comes under pressure near 1.3680

The better tone in the Greenback hurts the risk-linked complex on Tuesday, prompting GBP/USD to set aside two consecutive days of gains and trade slightly on the defensive below the 1.3700 mark. Investors, in the meantime, keep their attention on key UK data due later in the week.

Gold loses some traction, still above $5,000

Gold faces some selling pressure on Tuesday, surrendering part of its recent two-day advance although managing to keep the trade above the $5,000 mark per troy ounce. The daily pullback in the precious metal comes in response to the modest rebound in the US Dollar, while declining US Treasury yields across the curve seem to limit the downside.

XRP holds $1.40 amid ETF inflows and stable derivatives market

Ripple trades under pressure, with immediate support at $1.40 holding at the time of writing on Tuesday. A recovery attempt from last week’s sell-off to $1.12 stalled at $1.54 on Friday, leading to limited price action between the current support and the resistance.

Dollar drops and stocks rally: The week of reckoning for US economic data

Following a sizeable move lower in US technology Stocks last week, we have witnessed a meaningful recovery unfold. The USD Index is in a concerning position; the monthly price continues to hold the south channel support.