“The votes are in. They’ve been counted and verified. There’s no ballot stuffing, there’s no fowl play”. In absence of other meaningful news, we open with Monday’s traditional pre-Thanksgiving turkey pardon at the White House where US President Biden spared the lives of “Chocolate” and “Chip”. Other holiday season puns included that the only red wave this season would be the one stemming from his German shepherd (“Commander”) knocking over the cranberry sauce. In any case, the absence of US investors today set the stage for rangebound action in FX (EUR/USD 1.0420) while German/European bonds had some catching up to do with US Treasuries’ gains after the European closing bell yesterday. This results in daily German yield declines between 4.7 bps (2-yr) and 8.2 bps (10-yr). From a technical point of view, the German 10-yr yield lost support at 1.95% with the October low of 1.77% approaching very rapidly. The eco calendar was empty apart from November German Ifo business sentiment which improved more than forecast from 84.5 to 86.3, but remains low from an absolute point of view. Details were more hopeful though as pessimism regarding the coming months reduced somewhat (80 from 75.9), suggesting that the recession could prove less severe than many had expected. Contrary to Belgian consumer confidence on Monday (-22 from -27), business confidence deteriorated in November (-16.6 from -15.5; lowest since June 2020).
Sterling remains better bid with EUR/GBP moving south of 0.86 and ready to test key support at 0.8559/67. BoE Ramsden joined chief economist Pill in backing additional BoE rate hikes. Governor Bailey doubted the need of such moves given updated forecasts at the November policy meeting, but nevertheless suggested that more of them would come, though smaller. Ramsden cites the tight labor market and risk of inflation expectations becoming unanchored. He added that the long term Budget plans of Sunak-Hunt will have little impact on the central bank’s forecasts.
The Turkish central bank (CBRT) as expected lowered policy rates by 150 bps to 9%. With the final rate cut this cycle, the CBRT seeks to sustain growth momentum in industrial production and the positive trend in employment. Inflation hitting more than 85% y/y in October (x17 the 5% target) with more in the pipeline (PPI 151% y/y) is set aside as the result of rising energy costs, not supported by fundamentals and supply shocks. The MPC expect a disinflationary process to start soon and inflation should “cool” to 65% by the end of the year. Since August the CBRT has reduced rates by a cumulative 500 bps under the watchful eye of president Erdogan who called for single digit rates by the end of the year. USD/TRY as usual is an ocean of calm with the lira stabilizing around historic lows of 18.63 despite carrying an ever deeper (and world’s largest) negative real interest rate. It is believed that the central bank is defending the currency by draining its scarce and artificially boosted FX reserves. The FT just yesterday reported that Turkey and Saudi Arabia are discussing a deal to inject $5bn into the CBRT in a move that would shore up reserves.
Sweden’s Riksbank jacked up rates by 75 bps to 2.5% at today’s (and governor Ingves’ last) meeting. It also pulled the expected policy rate path higher to 3% in early 2023 vs 2.5% seen in September. It’s expected to stay there at least through 2025. Inflation remains far too high (CPIF 9.3%). Although headline price growth was a tad below the September forecast, inflation ex energy was unexpectedly high. CPI was revised upwards to 9.3% next year and will remain above target until the end of the policy horizon (2.2% in 2025). This poses substantial risks for entrenchment and demands further tightening, the central bank concluded, even as it comes with a cost for growth. The expected contraction for next year is now seen at 1.2% instead of 0.7% earlier. The Swedish krone lost ground following the decision as the expected terminal rate fell short of market expectations (3.25%) but recovered soon thereafter. Ingves said that the interest rate shouldn’t be lower than elsewhere in the world as this may lead to a weaker currency and a more difficult inflation battle. EUR/SEK is currently down for the day, trading around 10.83.