Inflation outlook in Europe improves as markets wait on FOMC minutes

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Published Date 1/4/2023

The trading pattern continued overnight, the 10 yr. note last night declined 11 bps from yesterday’s close. Stock futures improved overnight on positive reports from China and data from Europe boosted risk appetite. The dollar fell and Treasuries declined. China said to be considering more support for property developers that have been crushed recently. Inflation in Germany and France was better this morning supporting the view inflation has topped. France's December CPI -0.1% m/m (expected +0.4%; last +0.3%) and +5.9% yr./yr. (expected +6.4%; last +6.2%). Bond markets in Europe are all seeing lower yields today. Adding to the support this morning, Japan conducted another bond buying purchase to fend off higher rates. Late yesterday afternoon (4:45 pm ET) the 10 yr. note yield fell 4 bps from 4 pm levels; from 3.78% to 3.74%, MBS prices gained going into the close as treasury yields inched lower.

The inflation outlook continues to improve, news from Europe increasing the support for that view. The Fed knows it but so far there isn’t any comments from any Fed official that it will ease. Markets looking farther out expect the Fed to increase another 50 bps between the Feb 1st FOMC meeting and the next on March 22nd (25 bp at each)

Crude oil price is falling, the lowest price since Dec 21st. Crude increased when China relaxed the COVID restrictions believing demand would increase and so far, that hasn’t happened. China’s re-opening initially sent the price higher, but the re-opening hasn’t been smooth with infections still increasing. Oil also being driven by mild temperatures in the U.S. and Europe and curbing demand for oil in home heating systems. Warm weather and ample supplies of natural gas have pushed prices down more than 50% since the summer to about what they cost a year ago, before Russia’s invasion of Ukraine jolted energy markets.

Markets looking for additional clues from the FOMC this afternoon when the minutes from the Dec meeting will be released at 2 pm. The Fed ended 2022 with a firm promise at its December policy meeting that interest rates would continue rising this year, but at a slower pace and perhaps only by another fifty bps. The minutes may provide further insight into just how the endgame of the current tightening cycle will play out, and how deeply Fed officials are beginning to weigh risks to economic growth against their top-of-mind concern about inflation. The minutes still likely to show inflation has top billing among policymakers. It has been slowing for several months, but as of November the Fed's preferred inflation gauge - the personal consumption expenditures price index - was still rising at a 5.5% annual rate, more than twice the U.S. central bank's 2% target.

At 9:30 am the DJIA opened +113, NASDAQ +59, S&P +17. 10 yr. note 3.67% -7 bps. FNMA 5.5 30 yr. coupon at 9:30 am +16 bps from yesterday and +9 bps from 9:30 am yesterday.

At 10 am Dec ISM manufacturing index, expected at 48.1 from 49.0, the index hit at 48.4, the lowest index going back to May 2020; the employment index increased to 51.4 from 48.4 in Nov. The Fed wants employment to increase.

At 10 am Nov JOLTS job openings, expected at 10.1 mil from 10.334 mil, as reported 10.458 mil.

At 2 pm FOMC minutes.

Source: TBWS

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