ECB and BoE slow down to 50bps

This will be our last Daily Outlook for 2022. We wish all our readers the best over the festive season and a happy new year.

• Following on from the FOMC the day before, both the Bank of England and the ECB followed suit with a 50bps hike to their respective benchmark rates at their last meetings of the year yesterday, in line with expectations. For the BoE this took the bank rate to 3.5% on the back of its ninth rate hike in 2022 as the bank has looked to constrain inflation that has surged to 40-year highs. The CPI print did come down in the November print in data released the previous day, and Andrew Bailey wrote to Chancellor of the Exchequer Jeremy Hunt saying that he believed that the peak had been passed. Nevertheless, he cautioned that ‘further increases in bank rate may be required.’ By contrast to the FOMC, the decision was not unanimous with six members of the 9-member board voting for the 50bps hike, two wanting to leave rates unchanged and one preferring another 75bps hike.
• The ECB’s 50bps hike took the deposit rate to 2.0% while pledging to push rates ‘significantly’ higher still and President Christine Lagarde stressed that the slowdown in rate hikes did not represent a pivot but that there would rather be further 50bps hikes to come. Bloomberg reported that a sizeable number of board members were pushing for a 75bps hike but conceded to the consensus view so long as there were moves to reduce the bank’s balance sheet – the bank plans to start shrinking its EUR 5tn of bonds by EUR 15bn a month from March onwards. The bank expects inflation to remain above its 2% target still over the next three years and expects food and energy prices to head higher in the coming months.
• In the US, initial jobless claims in the week to December 10 came in at 211,000, down from the 231,000 the previous week and below the predicted 232,000, illustrating ongoing resilience in the labour market. On the other hand, retail sales data also released yesterday showed a larger contraction than anticipated in November as they shrank 0.6% m/m and by 0.2% when stripping out autos, compared with the predicted 0.2% contraction and 0.0% growth respectively. This was the largest fall for the measure in 11 months as spending shifted to services and consumers are increasingly feeling the pinch from high inflation and rising interest rates.
• CPI inflation in Dubai accelerated to 4.7% y/y in November, compared to 4.6% in October. The acceleration was anticipated given that transport has been a key determinant of the inflation rate this year, and petrol prices at the pump rose around 9.5% in November. Petrol prices came down modestly in December, falling 0.6% m/m.
• Japan’s composite PMI was flat at 50.0 in December, with manufacturing coming in contractionary at 48.8 while services expanded at 51.7. Both measures were improvements on the respective 49.0 and 50.3 recorded in November.

Today’s Economic Data and Events

• 12:15 France manufacturing PMI, December. Forecast: 48.0
• 12:30 Germany manufacturing PMI, December. Forecast: 46.3
• 13:00 Eurozone manufacturing PMI, December. Forecast: 47.1
• 13:30 UK manufacturing PMI, December. Forecast: 46.5
• 18:45 US manufacturing PMI, December. Forecast: 47.8

Fixed Income

• Yields on 10y USTs fell by 3.1bps on Thursday, after having risen higher on Wednesday following the Fed’s policy announcement, to reach 3.4463%. In contrast 2y USTs were up 2.68bps to reach 4.2362, further widening the closely watched 2s10s spread to levels last seen in the 1980s.
• Markets appear to have interpreted the BoE’s 50bps hike as dovish, with falls in UK 2 y and 10y gilt yields. The 2yr yield fell by 4.2bps to 3.3769% by the end of the day while the 10y fell by 7.07bps to 3.238%.
• Bond yields rose materially in European government bond markets on the back of hawkish comments from ECB president Christine Lagarde, with 10y German Bund yields rising 14.1bps to 2.078%.

FX

• The Dollar was stronger against most major currencies, reversing some its losses from the previous day. Sterling, in particular, fell materially to post its worst day against the Dollar in 6 weeks. GBP fell 2% to  1.2178, while EUR closed down 0.51% against the Dollar to reach 1.0628.

Equities

• There were falls across major stock markets yesterday. The NASDAQ, Dow Jones and S&P fell 3.23%, 2.25% and 2.49%, respectively. European stock markets also saw significant falls after the ECB signaled that there would be further tightening, with the Eurostoxx falling 3.51%. The Hang Seng fared better, ending higher up 1.2%.
• Locally the DFM rose 0.13%, while the Tadawul was up 0.41%.   

Commodities

• Oil prices were lower by the end of the day yesterday. Brent fell 1.8% to USD 81.21/b while WTI fell 1.51% to USD 76.11/b, although both have risen slightly this morning.
• Bloomberg reports suggest that there may be some tentative signs that Russian oil exports from the Asian port of Kozmino are dipping following G-7 sanctions price cap.

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