Breakfast Bites - Major Central Bank meetings are over for 2023!

Rise and shine everyone.

The big news this morning is the Bank of Japan doing nothing! This is what we expected. The vote was 9-0 in favor of no changes. I had hoped for some change to the language concerning wages or inflation, but none of that came through. In fact, during the press conference, Governor Ueda was quite adamant that inflation and wages had some ways to go.

I still think they make a move before real wages are positive but, likely they want to see a few more months of inflation before they do. The market front-running their rate hike is not helping either because it’s causing the Yen to strengthen pushing down cost-push inflation further. Remember, they want higher inflation to take hold. And then we have the other issue of real consumption and growth, which are both very low and hiking now may derail things. Fiscal policy is expected to help with GDP growth in Q4, and Q1 and if that happens, we may see some change in April 2024.

We posted this in Breakfast Bites on December 8, and we still stand by these thoughts for now. At least we’re done with major Central Bank meetings for the year.

US Equity Futures are marginally higher with the Russell 2000 leading. As rates ramped higher yesterday, we saw some pullback in the small-cap index. And now it’s recouping some of its losses.

Yields across the curve are lower with no material change to the Yield Curve at -0.52%. The US dollar index is flat even after the weakness in the JPY post this morning’s BoJ meeting. Gold and oil remain flat. Bitcoin is higher crossing 43,000.

FedEx and Southern Copper report today after the close.

What we’re watching: Freight rates and supply chain disruptions after yesterday’s limit-up. We’re seeing issues intensify in the Red Sea and Maersk has rerouted almost 20 ships around the south of Africa, which is a much longer journey. Iceland’s volcanic fissure may also cause disruptions to air freight over the arctic portal, and perhaps even air travel in Europe. The Iceland issues are unconfirmed as of now and we will be watching as the stories unfold.

Asia and Australia

• Asian markets are mostly higher except for Hong Kong. Mainland China is flat, while the Nikkei rallied on the BoJ decision.

• News from China suggests that the PBoC adviser says that China can achieve 5% GDP growth in 2024 (inline). On Dec 15th reports circulated that the China Central Economic Work Conference (CEWC) would recommend China set the 2024 GDP growth target at ~5.0%. In my opinion, this is a crucial decision. The way I see it, if China sets the GDP growth target at 5%, that will be ambitious, as the target range for 2024 is 4.5% to 4.8%. This ambition may actually drive them towards better stimulus measures to jumpstart the economy.

• RBA meeting minutes were not very hawkish. They reiterated being data-dependent and keeping an eye on evolving risks but were pleased with how inflation was progressing. The Board also noted that it will continue active consideration as to whether to sell bonds before maturity. Yields declined and equity markets were up.

• Japan MOF to front-load reduction of 20-year bonds by ¥200B from January 2024. The reports note that this reflects waning investor demand amid rising interest rates. This is now the other side to the Japan story, where the anticipation of higher rates will keep investors out of the market for a while because higher future rates mean lower bond prices. So if investors buy now, they are quite sure that prices will fall and generate a loss for them.

Europe, the Middle East, and Africa

• European Equities are firmer now and off their worst levels. Travel & Leisure and Tech lead, while Oil & Gas lag.

• ECB’s Villeroy (France) came out again today re-affirming no further hikes and that rates would be cut “some time” in 2024 after a plateau. French growth was revised lower but no longer to recessionary levels. Despite the hawkish view from the ECB during the last meeting, I still view a cut from the ECB before the Fed as a more likely scenario.

• Eurozone final CPI came out in line. CPI at 2.4% YoY; and Core CPI at 3.6% YoY. Our view is that core inflation will likely need to be below 3% for the ECB to cut, and we see that by June.

• German Finance Agency 2024 funding requirement: Trims federal debt sales to ~€440B from ~€500B in 2023. Breakdown of total issuance:

  • Plans to sell €165B in bills

  • Plans to sell €247.5B in conventional bonds

  • Plans to sell up €17-19B in green bonds

  • To syndicate up to €12B in conventional and green bonds.

The Americas

• Tesla plans to implement a pay increase of at least 10% for certain employees at its Nevada battery Gigafactory, according to US financial media reports. The pay raise is scheduled to begin in early January. Hourly wages for employees on the lower end of the pay scale will increase to $22 from $20, while those at the higher end will see their wages go up to $34.50 from $30.65

• The NAHB housing market index came out yesterday, inline with expectations at 37. Sales expectations over the next 6 months are picking up with the index increasing to 45 from 39. NAHB Chairman Alicia Huey: “With mortgage rates down roughly 50 basis points over the past month, builders are reporting an uptick in traffic as some prospective buyers who previously felt priced out of the market are taking a second look.” Considering the scarcity of existing home inventory, moderately reduced mortgage rates could jumpstart demand. In response to declining traffic, 36% of builders reduced home prices in November, marking the highest percentage since November 2022. This could now change given the Fed’s dovish pivot.

Charts of the Day

According to BofA’s Fund Manager survey, funds are the most underweight commodities against bonds since March 2009.

…. and Fund Manager Survey shows sentiment is the highest since January 2022.

Calendars

(news taken from Reuters, FT, Bloomberg; Calendar from Trading Economics)