Markets

Today’s US ADP job report served as the next test for markets eager to frontrun a sharp Fed pivot. November employment grew by 103k, less than the 130k expected and a further deceleration from an already downwardly revised 106k. The biggest contributors were trade, transportation and utilities (+55k) & education and health services (+44k). But a negative print in the leisure sector (-7k) points to weakness in the services sector along with goods sector (construction -4k, manufacturing -15k), ADP said. The numbers came on the back of (admittedly outdated) Q3 unit labor costs that have been adjust to the downside as well (-1.2%). Bond markets’ first reaction was tepid and almost suggested the correction lower in yields was nearing its end. But with the joining of American investors, things shifted in higher gear again. US yields at the front end returned back to the intraday opening lows. Longer maturities at some point turned 3 bps lower with intraday moves amounting to 7 bps. Technical charts came to the rescue for the likes of the 10-y yield. Support at 4.13% (50% retracement on the 2023 rally) in the meantime  narrowed losses to around 2 bps. Either way, these are not the strong moves down we’ve seen in recent weeks but note that the ADP job report doesn’t rank too high on the market influence list. Friday’s payrolls on the other hand are another story and are the litmus test for bond markets this week. German yields trailed their US peers, easing between 1.7-3.1 bps across the curve with the belly outperforming. UK gilts did best today, with yields shedding 3.1-8.1 bps. The Bank of England successfully kept markets betting on premature rate cuts on a leash but the global force is strong. The timing of a first, fully priced in rate cut moved from August to June in the last two days.

The fall-out on sterling from the latter remains limited though. EUR/GBP erased earlier losses to trade virtually unchanged around 0.857 but this is just as much technically inspired (rejected test of support at 0.8557) as it is genuine sterling weakness. EUR/USD is going nowhere with the pair unable to retake 1.08. Poland’s zloty awaits guidance from the National Bank of Poland after it kept policy rates steady (as expected) at 5.75%. Stock markets in Europe add another 0.7%. The EuroStoxx50 is nearing the YtD (intraday) high at 4491.51. Wall Street opens with gains between 0.25 and 0.4%.

News & Views

Italian foreign Minister Antonio Tajani today said that the country formally informed China that the country will end its participation in China’s Belt and Road initiative. Tajani said that the initiative hasn’t produced the desired effects and was no longer a priority for the country. Italy was the only G7 country that had subscribed to the Chinese initiative as it joined the pact in 2019. The 5-year term of the pact was due to expire in March 2022 and Italy had to decide on a prolongation before the end of the year. Italy participating in the project was a politically sensitive topic as the US and other Western countries took more balanced approach on their relationship with China amongst others due to issues on human rights, China’s positioning vis-à-vis Russia with respect to the war in Ukraine and as Western economies reevaluate their dependence on China supply in key economic sectors.

October retail and production data published by the Hungarian Statistical office today indicated that activity in the country remains sluggish. The volume of retail trade in October was 6.5% lower than in the same period last year. Sales volumes declined by 1.9% in food shops, 5.1% in non-food retailing and by 21.1% in automotive fuel sales. Sales also declined 0.3% compared to the September. Volume of industrial production in October also dropped 0.6% M/M and 3.2% Y/Y. Production dropped in the majority of manufacturing subsections, including computer, electronic and optical products as well as that of food products, beverages and tobacco products. However, as a glimmer of hope, the Statistical office mentioned that the two subsectors with the biggest weight, manufacturing of transport equipment and electrical equipment, posted an increase in production. After brining the emergency overnight rate again in line with the conventional base rate, the National Bank of Hungary (MNB) started cutting rates at a pace of 75 bps (currently 11.50%). MNB members indicated that they want to proceed at that pace at the Dec 19 meeting. Hungarian November CPI data will be published on Friday. The forint today hovered near EUR/HUF 380.