Markets
Trading initially was a long-drawn countdown to today’s US December CPI. Investors tentatively positioned for a rather soft report, with US yields easing 3-4 bps before publication of the data. The report brought a modest upside ‘surprise’. Headline inflation increased 0.3% M/M and 3.4% Y/Y from 3.1% in November (3.2% expected). Core inflation excluding food and energy was close to expectations at 0.3% M/M and 3.9% Y/Y (4.0% in November, 3.8% expected). Looking into the details, food price inflation eased to 0.2% M/M. Energy prices rose 0.4%. Services prices still added 0.5% M/M with shelter an important contributor (0.5% M/M). A 0.3% M/M dynamics for both core and headline measures, suggests that a deceleration to bring inflation sustainably back to the 2.0% target isn’t guaranteed yet. Aside from the higher than expected CPI, weekly jobless claims (202 k) remained at very low levels, suggesting ongoing labour market tightness. Even so, the reaction on US interest rate markets remained modest. Yields briefly jumped into green territory, but the move had no strong momentum. US yields currently are again trading little changed across the curve. Markets still see a >60% chance of a 25 bps Fed rate cut already in March. The US 10-y yield still struggles to hold north the 4.0% barrier (4.03%). Late today, governors Mester and Barkin have a chance to give an instant assessment. The US Treasury will conclude this week’s auctions with the sale of $21 bln 30-y bonds. With few important data scheduled on this side of the Atlantic, German yields are ceding between 4 bps (2-y) and 2.0 bps (30-y). A mild reaction on global bond markets also prevented a sustained decline in major equity indices. The Eurostoxx 50 moved into negative territory post the CPI release, but currently trades little changed. US equites struggle to maintain small opening gains.
On FX, the soft bond market reaction also capped a tentative attempt of the dollar to move higher. The DYX index (102.46) is going nowhere. EUR/USD eased to 1.0950, but first important support at 1.0877 stays out of reach. USD/JPY (146.10) again outperforms; with the pair setting a new YTD top. After a nice rebound of sterling against the euro last week, EUR/GBP today held a tight sideways range, close to, mostly slightly north of the 0.86 big figure.
News & Views
The Czech koruna slipped today. EUR/CZK moved from 24.58 to 24.63 though left intraday highs of around 24.68. CZK weakness followed a big miss in December CPI numbers. The monthly pace dropped from 0.1% in November to -0.4% vs an expected stagnation. This drove the yearly figure down from 7.3% to 6.9%, matching the September 2023 low before inflation accelerated again due to statistical base effects. The CNB was expecting 7%. Core inflation slowed in line with the CNB’s autumn forecast, to 3.6%. The monthly decline was driven by easing prices in domestic fuels (-4.7%), seasonal goods (-2.3%), transport (-1.1%) as well as food (-1.4%). Housing and utility costs inflation decelerated to 0.2%. These carry a big weight in the index. Today’s release brings another CNB rate cut closer in February although the real litmus test will be in January, when companies implement their usual repricing. As the previously mentioned base effects fall out of the equation, however, the CNB expects CPI to drop towards to the upper bound of the 2% +/- 1 ppt target range. Czech swap yields tumble up to 13 bps at the front end of the curve with money markets all but pricing in a 50 bps cut in February. In December last year, the CNB started cautiously with a 25 bps step.
Oil prices jumped towards $78/b (Brent) today. The UK Maritime Trade Operations said an oil tanker was hijacked by people in military-style uniforms before altering course to Iran. It’s a reminder of the tense situation in the broader Middle East region, where frequent attacks by Yemen’s Houthi militants also forced shipping companies to change their usual trajectory via the Red Sea and Suez Canal to go via the much longer route around South Africa. The CEO of a shipping giant responsible for about a fifth of ocean freight said the situation could last for months with implications for global supply. Container freight benchmark rates have risen sharply over the recent weeks. These indicators were closely watched back in the Covid driven supply chain disruption days. While they still trade well below the peak levels back then, freight rates have more than doubled from what were historically more normal levels end 2023.
