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GERMAN GAS SUBSIDY CLOUDS EURO AREA INFLATION PREDICTIONS (1049 GMT)
Uncertainty around how a one-off gas bill subsidy from the German government will be reflected in inflation figures is clouding predictions for 2023's first major euro area data drop.
Investors are looking ahead to preliminary euro area harmonised inflation data for December, due on January 6.
Hopes are high for another decline in overall headline inflation, as seen in the November numbers when it fell for the first time since mid-2021.
RBC economics and rate strategists expect the headline rate "to fall further to 9.4% y/y, a little higher than the 9.2% y/y currently priced by the inflation swaps market."
Along with lower energy prices, they expect German utilities to provide downward momentum, given the introduction of a one month subsidy by the German government that fully covers gas payments by households and small businesses in December.
But so far, the German statistics office hasn't published any formal guidance as to how the subsidy will be treated, write the strategists, creating "considerable uncertainty" as to how exactly this will be reflected in inflation data.
"Nonetheless the effects could potentially be large, with the Bundesbank noting in its recent monthly bulletin that it could “take the inflation rate into the single digits” in December (compared to 11.3% y/y in November) before being fully reversed in January," they note.
Even so, they expect core inflation in the euro area to rise amid higher food prices and services inflation, despite headline numbers declining. The RBC strategists think this pattern will persist throughout 2023.
PAINFUL MEMORIES OF 2008 FOR EUROPEAN RETAILERS (1026 GMT)
The STOXX 600 is on track for a 4.4% decline in December. This year, the index is set to have fallen for eight out of 12 months, its patchiest performance since the financial crisis in terms of the number of monthly losses in a calendar year. In 2008, the index fell 10 months out of 12, racking up a loss of 46% for the entire year. This year so far, the STOXX has "only" lost 12% - set for its third-worst annual performance in 20 years, after 2008 and 2002, when it fell 32%.
The pain has been fairly evenly distributed, with every major sector except commodities in the red. But with the cost of living soaring and rising borrowing rates, retail stocks have felt the pinch the most - the STOXX retail index, which contains the likes of fashion brands H&M and Next, as well as conglomerates like Zara owner Inditex - has lost 33% in value, the most since 2008. This is its worst underperformance compared with the STOXX on record.
STOXX 600 IN GOOD SHAPE AS SPORTS FASHION BRANDS SOAR(0925 GMT)
The STOXX 600 is looking healthier than it has in a while today, up 0.84%. All sectors are ticking higher but retail stands out, up 2.2%.
Sports fashion brands Puma, Adidas and JD Sports are helping the most, all up 7%-9.4% as they ride the coattails of yesterday's quarterly revenue beat by the world's largest sportswear Nike.
Real estate stocks are also performing strongly, up 1.6%.
Denmark-based international biotechnology company Genmab is the drag on the STOXX 600 on an index weighted points basis, with shares down 1.5% even after Citigroup raised its target price on the stock.
Mining giant Glencore is also providing a drag, down 0.3%, and is the second biggest negative weight on the index.
QUESTIONS AFTER THE STORM (0754 GMT)
A day after the Bank of Japan's bombshell and things are looking a little steadier. Most Asian share markets and U.S. stock futures are up, and the Nikkei down only modestly.
Yet the yen has only given back a sliver of yesterday's huge gains and Treasury yields have nudged higher again as markets clearly think the writing is on the wall for Japan's uber-easy policies, even if the BOJ insists otherwise.
Analysts assume a formal shift will come after Japan's Spring wage talks and BOJ chief Kuroda's retirement in April. Higher yields at home could make it more attractive for Japanese investors to repatriate some funds, particularly as hedging costs have been rising for offshore assets.
Removing the Japanese yield anchor would be painful timing for bond markets globally given many major central banks will be unwinding their QE holdings next year.
Analysts also suspect the BOJ shift meant the days of Japan desiring, or just accepting, a lower yen were over and the fallout in carry trades has been vicious.
Both the Aussie and kiwi fell 4% on the yen on Tuesday, even as Australian 10-year yields surged 23 basis points to maintain their premium over Japanese debt.
Other carry trades at risk include the Brazilian real, South African rand and Mexican peso, and exiting from those illiquid currencies will likely include a leg of selling the U.S. dollar for the yen.
On a side note, it was interesting that the BOJ put so much emphasis on maintaining the proper functioning of the bond market in its shock decision. Ever since the September meltdown in gilts, central bankers have sounded worried it could be repeated elsewhere.
It was notable that minutes of the Fed's November meeting showed the FOMC spent some time discussing the importance of an orderly Treasury market and the risk of possible disruptions as they tightened policy. Maybe this was one reason Fed Chair Powell's pushback against the November rally in Treasuries was not quite as full-throated as many had expected.
It leaves a sense of something going on behind the scenes, something urgent. Otherwise, why chose to drop this bombshell the week before Christmas.
Key developments that could influence markets on Wednesday:
- Canada's November CPI, where a downside surprise could bring the BOC closer to pausing its rate hikes.
- U.S. Conference Board version of consumer confidence and Germany's GfK consumer survey.
- Ukrainian President Volodymyr Zelenskiy is expected to travel to Washington to meet President Joe Biden and visit Congress, which would be worth a cheer.
A WELCOME LIFT FOR EUROPE (0741 GMT)
Europe is heading for gains this morning, a welcome change in mood given the STOXX 600 has clocked up only four up-days in December so far.
Futures on the Euro STOXX 50 and Germany's DAX are ticking up 0.6%-0.7%, while Britain's FTSE 100 look set to add 0.3% at the open.
It is a quiet week ahead of the holiday season, but European shares remain near six-week lows after plunging from an over six-month high last week amid a series of central bank decisions and murky PMI data drops to wrap up the week.
Markets are still digesting the Bank of Japan's surprise decision to loosen its yield cap monetary policy on Tuesday, as some sources say it could mark the beginning of an end to Governor Haruhiko Kuroda's controversial strategy and may pave the way for massive monetary stimulus to be phased out next year.
Meanwhile, Ukrainian President Volodymyr Zelenskiy is travelling to the United States to meet President Joe Biden and visit Congress on Wednesday in his first known overseas trip since Russia's invasion on Feb. 24.
Billionaire Elon Musk said on Tuesday he will step down as chief executive of Twitter once he finds a replacement. Twitter users voted for him to resign in a poll, which the billionaire launched on Sunday evening.
