Yield uptrend: Sustained momentum hinges on data outcomes


Yesterday’s market reaction to EMU and US eco data suggests that the bottom below core bond yields is becoming firmer after the significant November/December correction. Energy-related base effects and travel-related services costs caused a new uptick in national German/French inflation data, though in line with forecasts. Monthly price momentum was even softer than feared. Exactly the same figures would have evoked a bond rally last month around, but had the opposite effect yesterday. German yields added 7.2 bps (30-yr) to 11.9 bps (5-yr). The German 10-yr yield bounced off the 2% mark and is trying to escape the steep downward trend channel in place since December. Success in today’s close (>2.16%) would call off the correction and turn the technical picture more neutral short term with first real resistance situated around 2.32% (38% retracement on October to December yield decline). Aggregate EMU inflation figures are expected to clock at 0.2% M/M and 2.9% Y/Y (from 2.4%) for the headline reading while core inflation is set to slow from 3.6% Y/Y to 3.4% Y/Y. Deviations to consensus should be small after national outcomes. Anything bar a major downside surprise could keep Bunds on the backfoot.

The main dish will be served at the start of US dealings with December payrolls and services ISM. Yesterday’s consensus-beating labour market data extended the bond sell-off which started in Europe. US yields closed 5.4 bps (2-yr) to 8.3 bps (10-yr) higher. The US 10-yr yield regained the psychologic 4% mark and similarly tries to escape the downward corrective channel in place since the November Fed meeting. 38% retracement on the autumn 2023 downleg is located at 4.25%. As for European inflation, we think that the natural drift higher in yields since year-end could stay in place unless we see big data misses. Such scenario could help the dollar’s recovery. Especially if risk sentiment suffers from the recovery in bond yields. Key US benchmarks yesterday lost up to 0.5% for Nasdaq following steeper losses earlies this week. First support stands at EUR/USD 1.0893 (YTD/low) to 1.0875 (38% retracement on October/December rally). Comments by central bankers are wildcards for trading. If any, we think they will push back on (too) aggressive market pricing of 150 bps cumulative rate cuts this year.

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Data published by the Czech Finance Ministry yesterday showed that the Czech Budget deficit for 2023 declined 20% to CZK 288.5bn. This was below the budget target of CZK 295bn. The reduction in the deficit occurred as income was up 17% while overall expenditure rose 11% Y/Y. The rise in spending was mainly driven by higher pension costs and support to mitigate the cost of higher energy prices. Debt servicing costs also rose. On the income side, the government last year implemented a windfall tax on energy companies and banks. According to Finance Minister Stanjura, the government will make on new assessment on the windfall tax in spring. The Finance Minister expects the 2023 fiscal deficit to be below 3.6%. The Government debt to GDP ratio is seen at 42.3%. For 2024, the government aims to reduce the budget deficit to 2.2%.

In communication with the press during a visit in Nottinghamshire, UK PM Sunak indicated that his working assumption is for the UK Parliamentary elections to be held in the autumn of this year. The legal deadline is for the elections to be held in January 2025 at the latest. The opposition (Labour and the Liberal Democrats) called the government to hold election in May, but with the PM’s party lagging Labour by a huge margin of about 20% in the opinion polls, such a scenario looks unlikely. The government will propose a spring budget early March, which is expected to include measures to make progress in the five pledges the UK PM set out a year ago: halving inflation, growing the economy, stopping migrants entering in small boats, cutting NHS waiting lists and reducing national debt. Only the first of this five targets has been fulfilled as inflation dropped to 3.9% in November after reaching a peak of 11.1% in October 2022.

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