ON DECK FOR MONDAY, DECEMBER 11
KEY POINTS:
- Muted risk appetite ahead of a big week for markets
- China CPI: don’t call it deflation
- Yep dips as BoJ speculation pushes back on a December pivot
- Norges Bank likely to hold after CPI was weaker than expected
- US, Canada test appetite for bond auctions today ahead of a key week
- Global Week Ahead—Haste Makes Waste
As a reminder, please see the Global Week Ahead—Haste Makes Waste here in publication format and, for clients, the highlights deck is in your inbox.
A huge week for global central banks and macro data is starting off slowly. Risk appetite is muted ahead of these developments and with limited follow through from Friday’s nonfarm payrolls report (recap here). N.A. stock futures are a touch negative, ditto for European cash markets and Asian equities were mixed with more gainers than decliners. Sovereign bonds are mildly cheaper in the US and there is a slight richening bias across EGBs with nothing much happening across the gilts curve. The dollar is flat on a DXY basis.
China’s inflation rate fell by more than expected last month but don’t call it deflation. CPI was -0.5% y/y (-0.2% consensus). Core CPI was unchanged at +0.6% y/y and -0.3% m/m NSA. Core typically is typically soft in November in seasonally unadjusted terms and this time it was a bit softer than usual (chart 1).
Why not deflation? For starters, the headline softening was driven significantly by lower oil prices last month with a slightly faster rate of decline in food prices. Other categories were soft, but showed little breadth to the decline.
Second, the definition of ‘deflation’ is typically stricter among economists than used by some of the coverage. That definition requires a sustained, economy-wide decline in prices that changes behaviour such that people postpone spending into a future period when prices are expected to be broadly lower. That, in turn, becomes a dangerous downward spiral from which policy may find it difficult to escape. To label China as being in such a situation is highly premature.
We’ll see how the PBOC views this on Thursday when it decides what to do with its 1-year Medium-Term Lending Facility Rate, but almost everyone expects a hold as speculation about another RRR cut is being combined with expectations for further fiscal stimulus into next year on the back of comments following China’s Politburo meeting last week.
The BoJ rollercoaster ride continues. This morning’s rumour mill is leaning against speculation that the BoJ may end negative rates next week. The sources are the usual anonymous folks who point to waiting to see how the Spring wage negotiations proceed. The yen is leading decliners to the USD this morning.
Norway’s CPI was a touch softer than expected ahead of Norges Bank’s decision on Thursday. CPI was up 0.5% m/m SA (0.7% consensus) with underlying inflation down -0.2% m/m (-0.1% consensus). That resulted in a further mild reduction of the market probability of a rate hike this week to nearly zero. Consensus is split with a mild majority of 9 economists expecting a hold and 7 a 25bps hike. The uncertainty stems from the fact that the November 2nd Norges Bank statement said there had been more than expected progress on inflation and that the need for further hikes “depends on economic developments.”
There is nothing terribly notable on tap into the N.A. session. Data wise we’ll only get the NY Fed’s measure of 1-year ahead inflation expectations for November (11amET) after it has been falling from a peak of 6.8% to 3.6% in October. Bond land will take down a US 3s auction (11:30amET) and then a 10-year Treasury notes reopening (1pmET). The pattern to date in bid-to-cover ratios is shown in chart 2 as one measure of auction performance.
Canada also auctions $5.5B of 2s at 12pmET.
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