MNI EUROPEAN MARKETS ANALYSIS: Dollar Bid Ahead Of Busy Central Bank Slate

MNI ECB Preview - December 2022: 50bp Or 75bp? It’s Too Close To Call

MNI ECB Preview - December 2022: 50bp Or 75bp? It’s Too Close To Call

• While we initially expected the ECB to deliver another 75bp hike in December – and had euro area inflation surprised higher again this would have remained our assumption - our conviction has since ebbed.
• Uncertainty over whether inflation has peaked, how far the ECB will go when it unveils the ‘key principles’ for APP reduction, and shifting sentiment among both doves and hawks within the GC, make the decision between hiking 50bp and 75bp much more finely balanced.
• In any case, signs of broadening price pressures, little evidence (so far) that the slowdown in economic activity will be severe or protracted, limited policy rate tightening compared to the Fed and BoE, and the considerable intra-eurozone inflation spread, still suggest that the ECB has someway to go in restoring price stability.
• For the full publication please see: ECB Preview December 2022.pdf

MNI BOE Preview - November 2022: 4-way split with 50bp hike

• The MNI Markets team (along with 20/22 analyst previews we have read) expects a 50bp hike at this week’s MPC meeting. Assuming the 50bp hike is delivered, the breakdown of the vote and the forward guidance will arguably be the biggest drivers of markets moves.
• We expect a 4-way split in the vote with Tenreyro voting for rates on hold, Dhingra for a 25bp hike, Mann and Haskel a 75bp hike and the other 5 members of the MPC voting for 50bp.
• We expect the MPC's guidance of further "forceful, if necessary" hikes to be maintained and discuss options on how they could change their guidance around the markets' peak.
• For the full document including summaries of over 20 sell side view see:

MNI BoE Preview - Dec22.pdf

MNI SNB Preview - December 2022: Hike Expected, But Could Signal Peak Nearing

Executive Summary:

• Tightening cycle will continue in Q4, with the bank likely to raise rates by 50bps to 1.00%
• Sell-side analysts are split, with the majority looking for a 50bps hike, but a notable minority looking for either a 25bps or 75bps move
• Inflation-adjusted FX rate sits below recent highs, opening the possibility of more forceful language on the Franc
• Full preview including summary of sell-side views here: MNISNBPrevDec22.pdf

MNI Norges Bank Preview - December 2022: Approaching End of Cycle

Executive Summary:

• Bank are on track for another 25bps rate hike in December, putting the deposit rate at 2.75%
• Governor may acknowledge bank are nearing end-of-cycle
• Market well priced for 25bps move, with focus on potential rate cut timing
• Full Preview including summary of sell-side analyst views here: MNINBPrevDec22.pdf

Norway’s economic outlook has deteriorated since the November decision, with the much-watched RNS outlook survey falling short of expectations and signalling elevated uncertainty and a likely slowdown headed into 2023. Nonetheless, the very low unemployment rate and a CPI-ATE measures well ahead of Norges Bank’s September forecast will keep concern among the board for the next wage-setting cycle in the coming quarter.

US TSYS: Off Session Lows As Curve Twist Flattens

TYH3 deals at 114-25+, +0-02+, after ticking away from the base of its 0-11 overnight range, operating on volume of ~73K.

• Cash Tsys are 3.0bp cheaper to 1.5bp richer across the major benchmarks, with the curve twist flattening, pivoting around 20s.
• Early Asia dealing saw regional participants exhibit a willingness to fade the richening observed during Fed Chair Powell’s post-FOMC meeting press conference.
• Cheapening then extended as cross-market impact from the Antipodean rates space was felt, as both ACGBs and NZGBs softened on stronger than expected local data, before Tsys then moved away from session lows through the Asian afternoon.
• The space looked through weaker than expected monthly economic data from China, with more focus on the recent alterations in China’s COVID-related reactions.
• A block seller of FV futures headlined on the flow side (-1.7K).
• Fed dated OIS price ~32bp of tightening for the Feb ’23 meeting and a terminal rate of just under 4.90%, shy of the ~5.10% seen in the Fed’s latest dot plot.
• In Europe today we have the ECB, BOE and SNB rate decisions. Further out there is a slew of U.S. data including retail sales, TIC flows, business inventories, Empire M’fing survey, initial jobless claims and industrial production.

JGBS: 20s Struggle In Wake Of Poorly Received Supply

JGB futures consolidated their overnight losses in Tokyo dealing, with the cash space playing catch up to the post-Tokyo weakness, which was linked to the latest news wire source reports surrounding the potential for a BoJ policy framework review in the post-Kuroda era (that we have documented elsewhere).

• There was a soft reception for the latest round of 20-Year JGB supply, which saw the low price, and indeed the average price, miss wider dealer expectations, with the cover ratio nudging further below the 6-auction average.
• A combination of spill over from the core global FI price action during the Tokyo lunch break and the weak auction details applied pressure to JGB futures in early afternoon trade, although the overnight lows in futures were not tested on the move. 20s cheapened on the curve.
• The space then regained some poise into the close, leaving futures -20 at the bell, while cash JGBs were little changed to 4bp cheaper, with 20s providing the weakest point, both pre- and post-supply.
• In domestic news flow we saw continued rumours surrounding tax tweaks to fund Japan’s increased defence spending, but this was inconsequential for markets, with the broader tax category alterations already highlighted by policymakers.
• Looking ahead, Friday’s local docket will be headlined by flash PMI readings.

MNI Norges Bank Preview - December 2022: Approaching End of Cycle

Executive Summary:

• Bank are on track for another 25bps rate hike in December, putting the deposit rate at 2.75%
• Governor may acknowledge bank are nearing end-of-cycle
• Market well priced for 25bps move, with focus on potential rate cut timing

Full Preview including summary of sell-side analyst views here:

MNINBPrevDec22.pdf

The step-down in the size of hikes for November marked a shift in the board’s approach to policy, with the balance of risks surrounding growth now being prioritised over the still higher-than-expected rate of core inflation. In November’s press conference and policy statement, the bank flagged declining energy prices, spiralling consumer confidence and a weaker housing market as key factors in their decision. These three indicators have all deteriorated over the past quarter, leaving an assumed December hike one of the likely final tightening steps of the cycle.

Norway’s economic outlook has deteriorated since the November decision, with the much-watched RNS outlook survey falling short of expectations and signalling elevated uncertainty and a likely slowdown headed into 2023. Nonetheless, the very low unemployment rate and a CPI-ATE measures well ahead of Norges Bank’s September forecast will keep concern among the board for the next wage-setting cycle in the coming quarter.

JAPAN: Japan Sells Offshore Bonds, While International Investors Buy Japanese Paper & Equities

Weekly international security flow data out of Japan saw the previous week’s net purchases of foreign bonds more than reversed, while there was a second consecutive round of modest net buying of foreign equities by Japanese investors.

• On the other side of the ledger, foreign investors pared a fair amount of the net sales of Japanese bonds seen in the previous week, while they recorded the largest round of weekly net purchases of international stocks observed since early October

Source: MNI - Market News/Bloomberg/Japanese Ministry Of Finance

AUSSIE BONDS: Labour Market & Offshore Matters Apply Pressure

The combination of a firmer than expected domestic labour market data, trans-Tasman impetus from a blockbuster NZ GDP release and payside swap flow-derived pressure weighed on ACGBs during the post-FOMC Sydney session, leaving YM -7.0 & XM -9.2 at the close, below their respective overnight session bases. Cash ACGBs were 7-10bp cheaper across the curve, with bear steepening in play.

• There was some widening of the AU/U.S. 10-Year yield spread, which moved back towards parity, closing around the -5bp mark.
• Bills finished 8-14bp cheaper on the day, with the back end of the whites and front end of the reds underperforming.
• This came as market pricing re: RBA tightening shifted higher, with RBA dated OIS now pricing ~19bp of tightening for the Feb ’23 meeting, alongside a terminal cash rate of just under 3.80%.
• EFPs were wider against this backdrop.
• Note that we saw a moderation in the monthly consumer inflation expectations print, which pared back to 5.2% from 6.0% (over a 1-Year horizon).
• Flash S&P Global PMI data headlines the local docket on Friday.

AUSTRALIA: Labour Market Tightens Further, Continuing RBA Concern

Employment grew by significantly more than expected in November and October was also revised up almost 11k. There were 64k new jobs in the month which was enough to keep the unemployment rate stable at 3.4% despite the participation rate rising 0.2pp to 66.8%. This report suggests that the labour market must be close to capacity and that it is likely to continue flashing red for the RBA.

• The economy has added 482.4k jobs this year with 166.8k of those being in the last four months. Employment is now 6% above March 2020, the pre-pandemic peak.
• The number of full-time jobs rose 34.2k in the month and 478.9k for the year and part-time rose 29.7k and 3.4k respectively. The huge gap between full-time and part-time job growth in 2022 reflects employers’ response to severe labour shortages.
• Hours worked fell 0.4% m/m due to a third more people being off due to illness than is normal for the time of year. This follows a strong 2.4% increase in October and the level is well above pre-Covid. 3-month momentum rose to 8.7% for full-time but is -1.5% for part-time.
• The underutilisation rate fell 0.1pp to 9.3%, it is now its lowest since early 1982 and another indicator showing the degree of labour market tightness. Underemployment fell 0.1pp to 5.8%.
• The increase in the participation rate brought it back to its record high reached in June 2022 and it is now 1pp higher than February 2020. The employment-to-population ratio is now also at a record high of 64.5%.

Source: MNI - Market News/ABS

AUSTRALIA: Inflation Expectations Moderate And Remain Anchored

The Melbourne Institute’s measure of inflation expectations moderated to 5.2% in December after 6% the previous month and in line with the moderation seen in petrol prices so far this month (see "Petrol Prices Point To Easing In December Inflation Expectations"). It is now at its lowest since April. Given it has moved in the same direction as petrol prices in every month from June, it is difficult to gauge if it is signalling a peak in inflation. But the RBA should continue to feel confident that inflation expectations are anchored.

Fig. 1: Australia MI inflation expectations % vs CPI y/y%

Source: MNI - Market News/Refinitiv

NZGBS: Pressured As GDP Hawkishly Reshapes RBNZ Pricing

NZGB yields shifted higher on Thursday, with NZ GDP data, regional reaction to the FOMC meeting and some trans-Tasman impetus in lieu of a firm round of Australian labour market data all applying pressure at different points in the day.

• That left the major cash NZGB benchmarks 14.5-16.5bp cheaper across the curve at the close, with the wings leading the weakness.
• Swap rates were 13-16bp higher across that curve, with some flattening apparent, leaving swap spreads little changed to a touch narrower.
• This came as RBNZ dated OIS shunted higher, to virtually fully price a 75bp hike at the Feb ’23 meeting, alongside a peak OCR of just below ~5.60%, as the market eyes the potential for a more pronounced round of monetary tightening in a bid to “cool the jets” after the much firmer than expected GDP print (which blew all expectations, including that of the RBNZ, out of the water).
• Today’s NZGB supply (covering NZGB Apr-27, Apr-33 & May-51) saw cover ratios between 1.50-2.00x, representing smooth, albeit relatively vanilla, reception of the auctions.
• Friday’s local docket will headlined by m’fing PMI and non-resident bond holding data.

NEW ZEALAND: Strong Q3 Growth But Consumer Softening, RBNZ Watching

Production-based GDP rose a much stronger than expected 2% q/q in Q3 to be up 6.4% y/y, which was boosted by very positive base effects. The expenditure measure of GDP also rose 2% q/q. Even though this data is backward looking, it is unsurprising that the RBNZ said yesterday that the challenge is to bring growth down in order to combat inflation. Q4 started from a position of strength and the RBNZ will be watching developments closely before its February meeting.

• The expenditure measure of GDP rose 2% q/q after an upwardly revised 2.3% in Q2. This brought the annual rate to 6.5%, which was boosted by Covid-related base effects. The main contributors were net exports, with exports up 7.8% q/q, and investment rising 3.3% q/q, with the strength broad based. Household consumption fell 0.1% q/q, which was the second consecutive negative quarter, possibly reflecting the impact of higher rates.
• Activity was driven by transport, postal and warehousing, which rose 9.7%. This sector includes tourism which is benefiting from the post-Covid border reopening. Services exports rose 25.7% q/q. Good-producing industries rose 2.4% and construction 5.1%.

Source: MNI - Market News/Refinitiv

​FOREX: Dollar Firms, Aided By Higher Yields ​​​

The USD has firmed as the session has progressed. The BBDXY is up around 0.25% for the session so far, putting the index above 1254.00. Highs post the FOMC in NY trading were around 1256.75. The USD has been aided by a 3-4bps move higher in yields (2-7yr part of the curve), while softer equity sentiment in the region has also weighed.

• AUD/USD is among the weakest performers, down over 0.50% at this stage, and back sub 0.6830. This comes despite employment data comfortably beating expectations. Commodities are weaker in terms of oil and copper, with weaker China activity data a potential catalyst, although iron ore is trading resiliently (last above $109/tonne).
• NZD/USD is down 0.30%, last under 0.6440. NZ also saw better data, this time in terms of Q3 GDP, which has buoyed NZ bond yields. This has likely help NZD outperform on a cross basis. AUD/NZD is back to the low 1.0600 region, against NY session highs above 1.0600.
• NOK is also weaker by 0.50%, with USD/NOK back above 9.7700, as oil prices weigh.
• USD/JPY has been supported on dips, the pair last 135.75/80. The yen has slightly outperformed on a cross basis.
• Looking ahead, in the US, retail sales data print, there are also jobless claims and the Philly and NY Fed surveys. A number of European central banks meet with the focus on the ECB and BoE.

MNI Insight: AUD/NZD FX - Rate Differentials Still Point Down, Relative Commodities Offsetting

EXECUTIVE SUMMARY

• Through the first half of December the AUD/NZD cross has stabilized, broadly oscillating around the 1.0600 level. This comes despite market pricing around the respective central bank outlooks continuing to move against the AUD. Relative rate differential momentum continues to point to further downside in the cross. A fresh break through recent lows could see 2021 lows come into play under 1.0300.
• Relative commodity prices are painting a different picture though and have arguably helped stabilize sentiment. Since the first half of November relative terms of trade proxies have moved in the AUD’s favor as market optimism around China’s shift away from CZS brightens the 2023 outlook. This could leave relative commodity prices as more important driver of the cross as we progress through 2023, particularly once we get closer to an RBNZ rate cycle peak.
• A firmer AU commodity price backdrop is far from assured next year though, with lots of moving parts influencing the outlook. Growth prospects in the US/EU etc are fairly downbeat at this stage and could present a meaningful offset to any China rebound.
• See the link below for the full piece.

AUDNZD Update (Dec 15).pdf

FX OPTIONS: Expiries for Dec15 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0450(E3.5bln), $1.0500(E542mln), $1.0550(E526mln), $1.0600(E551mln), $1.0700(E1.7bln)
• USD/JPY: Y138.80-00($1.1bln)
• GBP/USD: $1.2350(Gbp1.5bln), $1.2450(Gbp693mln), $1.2495-00(Gbp574mln)
• USD/CAD: C$1.3500($659mln)
• USD/CNY: Cny6.9900-00($1.8bln), Cny7.1500($1.1bln)

CHINA: Activity Data Disappoints, But Limited Market Reaction

China November activity figures were weaker across the board relative to expectations. IP printed at 2.2% y/y (3.5% forecast), while retail sales fell -5.9% (-4.0% forecast). Fixed asset investment eased to 5.3%, (5.6% forecast), while property investment fell to -9.8% (-9.2% forecast). The unemployment rate edged up to 5.7% (5.6% forecast), while earlier new home prices fell -0.25%, a slightly reduced pace compared to -0.37% in October.

• It's hard to find positives in these figures and as we noted yesterday ahead of the data, near term growth prospects are being impacted by the current Covid wave. Higher frequency indicators, like metro rail rides, are well down in some major cities such as Beijing. So, a sharp turnaround in December prints is unlikely.
• This may keep indicators like the Citi China EASI bias lower, see the chart below. However, unlike through April/May or through August/September, weaker data outcomes aren't equating to higher USD/CNH levels at this stage (this is the other line on the chart, note it is inverted).
• A weaker growth backdrop is a well-established theme in China at the moment, and the market is looking to the 2023 outlook for now at least, when the move away from CZS should drive a firmer rebound.
• USD/CNH got to 6.9655 post the data, +0.30% for the session, but we are now back to 6.9600. Broader USD sentiment is also positive amidst higher US cash Tys yields.
• China bond yields are close to unchanged, despite the earlier net 150bn injection via the 1yr MLF. Mainland equities are weaker for the session but if anything, markets are slightly higher post the data outcomes. The CSI 300 was last around -0.35%.

Fig 1: Citi China EASI & USD/CNH (Inverted)

Source: Citi/MNI - Market News/Bloomberg

ASIA FX: USD Firms, BSP and CBC Expected To Hike Rates Later

Most USD/Asia pairs have gravitated higher today. This is line with USD gains against the majors, amidst a firmer yield backdrop and lower regional equities. Still to come is the BSP decision, where +50bps is expected. The CBC in Taiwan is also expected to raise rates later, but by a more modest +12.5bps. Tomorrow the data calendar is fairly light, with Singapore exports likely to be the main focus point.

• USD/CNH is around session highs at the time of writing, last at 6.9650. This is +0.30% higher for the session. November activity data was noticeably weaker than expected, although this didn't impact FX sentiment much. Higher UST yields have weighed, along with broad based USD gains against the majors. The fixing bias is almost back to flat as well, perhaps indicating comfort with current CNY levels.
• 1 month USD/KRW has found selling interest above 1300, last around 1299.50. Onshore equities have corrected lower, down around 1.35% at this stage. Trade prices continued to show declining momentum for both export and import prices.
• 1 month USD/IDR got to a high of 15632 before some selling interest emerged. The pair was last around 15620, well within recent ranges. November’s trade surplus was better than expected, largely thanks to weaker import growth (-1.89%, +6.32% forecast), with the surplus printing at $5.160bn, above expectations but down from last month. Export growth continued to soften (5.58% y/y, from 11.94%). The Indonesian parliament passed laws that enables BI to buy government bonds during times of crisis.
• USD/INR is just under 82.50 in spot terms, little changed for the session so far. Onshore equities are down 0.50% at this stage, while bond yields are mostly higher, +1-2bps up across the curve. Yesterday's wholesale inflation data showed a decent down surprise +5.85% y/y, versus +6.30% expected.
• USD/PHP is lower in spot terms, back under 55.70, but the 1 month NDF is above this level, which is +0.30% higher than NY closing levels. The BSP decision is due in a little over an hour, which should deliver a 50bps rate hike.

EQUITIES: Weaker Across The Board

Regional equities are tracking lower, although for some of the major index's losses haven't extended since the open. These moves are in line with overnight weakness in major bourses, while US futures have edged lower this afternoon. Higher US cash Tys yields, 3-4bps firmer across the curve, have also weighed on broader risk appetite.

• China/HK stocks opened lower, but have recouped some losses as the session progressed. The HSI is down a little over 1.1% at this stage, while the CSI 300 is off by -0.25%.
• China activity data was uniformly weaker than expected, but there was a 150bn net injection via the 1yr MLF, which likely helped sentiment at the margin.
• The Kospi is down over 1.2%, while the Taiex is close to flat. Japan stocks are weaker, with the Nikkei 225 down 0.40% at this stage. The weaker tech trend from overnight has likely weighed on these markets today.
• South East Asia markets are lower across the board.

GOLD: Gold Prices Down On Hawkish Fed Comments

Gold prices are down during the session by 0.8% to around $1793.50/oz unwinding just over half of the post-US CPI gain. Even though DXY is only up slightly, gold markets have been rattled by Fed Chairman Powell’s comment that rates are not yet close to their terminal rate.

• The Fed’s rate expectations were revised up to end 2023 at 5.1% before being eased to 4.1% in 2024. A longer and higher rate trajectory is likely to weigh on bullion as it is non-yielding and thus other assets become more attractive to investors. But there tends to be safe haven buying of gold during recessions. As a result, ANZ has revised up its end-2023 forecast to US$1900/oz.
• Despite the correction seen today trend conditions for gold remain bullish. Resistance is at Tuesday’s high of $1824.50.
• In the US, retail sales data print for November and are expected to moderate from the October gains. There are also jobless claims and the Philly and NY Fed surveys. A number of European central banks meet with the focus on the ECB and BoE.

OIL: Oil Prices Ease As Pipeline Partially Reopens

MNI (Australia) - Oil prices are down around 0.8% during the session but they have been trading in a range of around a dollar. The partial reopening of the Keystone pipeline in North America weighed on crude after it rallied over the week. WTI is currently trading around $76.60/bbl and Brent $82.10.

• Prices are now below the resistance levels they broke through during the NY session.
• The reopening of Keystone helped to ease supply concerns in the market. The demand outlook continues to be influenced by the offsetting factors of a tightening Fed and China reopening its economy.
• The International Energy Agency said in its report yesterday that prices may rise in 2023 as sanctions impact Russian supply and demand improves. But it expects demand in early 2023 to be muted.
• In the US, retail sales data print for November and are expected to moderate from the October gains. There are also jobless claims and the Philly and NY Fed surveys. A number of European central banks meet with the focus on the ECB and BoE.