Tomorrow, we receive important info on the second pillar via Q3 negotiated wage data

Markets

US Treasuries followed last week’s recipe. Testing the recent low (area; depending on the maturity), but eventually rebounding higher. This time without strong trigger though like Thursday’s Powell speech or Friday’s retail sales. The move seemed more erratic in nature. Timing didn’t fit with the release of second-tier, but consensus-beating US figures. NY Fed services business activity rose from -2.2 to -0.5 in November, with details showing strength in business activity and employment. Both in the current and 6-month forward looking subindex. The NAHB housing index recorded a third consecutive increases to a 7-month high, from 43 to 46. The 6-monht sales outlook reached the highest level since April 2022 on hope on looser regulation and more construction during president Trump’s second tenure. Yesterday’s price action strengthens our short term consolidation call as dust settles over the US presidential elections, in absence of important eco data and with the Fed not in a hurry. Intraday changes on the US yield curve ranged between -0.7 bps and -3.3 bps with the belly of the curve outperforming the wings. German Bunds underperformed US Treasuries (GE 2y: +5.4 bps) in what could be the start of an opposite (to US Treasuries) consolidation phase. EUR/USD profited from relative yield dynamics with the pair being squeezed from 1.0531 to 1.0598. Dovish Greek ECB member Stournaras labelled a December 25 bps rate cut a done deal and added that it’s an optimal reduction. That way, he dented more aggressive market bets calling on a 50 bps move (25% probability). This week’s eco data have the potential to completely close the door obviously depending on their outcome. The ECB built her recent reaction function on what her president Lagarde calls “the three criteria”: the inflation outlook, the dynamics of underlying inflation and the strength of monetary transmission. Tomorrow, we receive important info on the second pillar via Q3 negotiated wage data. Annualized wage growth remained between 4.3% and 4.7% from Q1 2023 to Q1 2024. Last quarter’s decline to 3.5% was welcomed by the ECB in its inflation fight, but remains way above the central bank’s 2% inflation target. ECB Lagarde indicated that forward-looking wage trackers point to a an easing of pay growth in 2025 which she hopes to see reflected in tomorrow’s numbers. On Friday, EMU November PMI’s are expected to paint a similar, dire, picture as in October (50 for composite). Recall though that there was a serious discrepancy between weak Q3 soft data and hard data (+0.4 Q/Q EMU GDP growth).

News and views

ECB chair Lagarde in yesterday’s “The economic and human challenges of a transforming era” speech again called for a(n effective) single market for both goods and capital in order to reverse progressively slowing productivity. “By acting as a union to raise our productivity growth, and by pooling our resources in areas where we have a tight convergence of priorities – like defense and the green transition – we can both deliver the outcomes we want and be efficient in our management of public spending.” Lagarde stressed the need for such changes given the two megatrends that are challenging the bloc’s economic model. The first is a new geopolitical landscape. An increasingly inward-looking global environment is a hazard to the open European economy. The second is Europe falling behind in emerging technologies, specializing mostly in technology developed the last century. Lagarde said the innovation and financing ecosystems are not suited to develop new advanced technologies, noting that about a third of EU savings sit in cash and bank deposits compared to around one-tenth in the US. She floated an amount of up to €8tn that could be redirected into long-term investments if EU households were given better opportunities to invest their savings. The still-existing trade barriers within the EU’s single market for goods and capital are estimated to represent a shortfall of around 10% of the EU’s economic potential.

San Francisco Fed economists in research published yesterday said that the US labor market is still adding to inflationary pressures, be it less than in 2022 and 2023. "Declines in excess demand pushed inflation down almost three-quarters of a percentage point over the past two years. However, elevated demand continued to contribute 0.3 to 0.4 percentage point to inflation as of September 2024." The findings offer some counterweight to Fed chair Powell’s observation back in the summer, when he said that the job market is no longer a source of significant inflationary pressures.

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