Expect More Sentiment-Driven Trading Today

Today's trading in the markets is expected to be influenced heavily by sentiment. This comes as the Chinese Politburo has issued a directive that has shifted risk sentiment among investors. Initially, there was a slight risk-off attitude due to ongoing developments in Syria. However, with China's commitment to supporting its ailing economy, sentiment turned mildly risk-on. The government plans to implement extraordinary countercyclical fiscal measures alongside a "moderately loose" monetary policy, which has been defined as "prudent" since 2011. This approach aims to stabilize both the stock market and the property sector.

The annual Central Economic Work conference in China is set to begin on Wednesday, and it is anticipated that this meeting will provide more insights into targeted measures aimed at fostering economic growth.

Market Movements

As the European trading day progressed, risk sentiment began to decline, particularly as US stock markets saw a correction, especially in the technology and AI sectors. The EUR/USD fluctuated around 1.0550, lacking a clear direction. Additionally, US Treasuries performed worse than German Bunds, although no specific factors were identified that drove this divergence. The NY Fed's consumer survey may have played a role in the anticipation leading up to the upcoming November CPI print.

In terms of yield changes, daily fluctuations on the US yield curve varied between +2.1 basis points for the 2-year note and +5.1 basis points for the 7-year note. Meanwhile, the German yield curve demonstrated a bear steepening, with yields climbing up to 3.2 basis points, particularly in the 30-year sector. The longer end of the European curve appears to be showing early signs of fatigue after an impressive rally since the end of October.

Today's Economic Agenda

Today's economic agenda is relatively light, featuring the NFIB small business optimism index and the beginning of the US Treasury's mid-month refinancing operation involving $58 billion in 3-year notes. More attention will be given to the upcoming $39 billion 10-year note auction tomorrow and Thursday's $22 billion 30-year bond auction, especially considering the uncertainty surrounding next year's spending agenda of the US president-elect. With the upcoming US CPI report and the ECB meeting later this week, sentiment-driven trading is expected to dominate today. European bonds, particularly at the longer end of the curve, could face some technical corrections. Furthermore, the euro's potential for rebound is constrained around 1.06 due to a likely dovish outcome from the ECB.

Consumer Expectations and Inflation

The NY Fed's November consumer inflation survey revealed a slight increase in inflation expectations, with projections rising by 0.1 percentage points across short-, medium-, and long-term horizons. Specifically, the one-year inflation projection has increased to 3%, while the three-year expectation has risen to 2.6% and the five-year outlook stands at 2.9%. Alongside this, consumers have expressed increased uncertainty regarding future outcomes.

Regarding the labor market, US consumers expect their earnings to grow by an average of 3%, which has remained steady within a narrow range since the beginning of the year. Additionally, there is an increase in the percentage of those expecting the unemployment rate to rise in one year, now at 35%, although this is still below the 12-month average of 37%.

When it comes to household finances, families anticipate their income will rise by 3.1%, remaining within the range that has been established since January 2023. Consumers expect spending to grow at a pace of 4.7%, slightly less than in October but still above pre-pandemic levels. Overall, the sentiment among US consumers indicates a positive outlook for their financial situation over the next year, with the share of those believing it will improve reaching the highest level since February 2020.

Monetary Policy Insights from Australia

The Reserve Bank of Australia's decision to maintain current interest rates came with some dovish nuances. The RBA noted its concerns regarding the most recent Q3 GDP growth figures, which recorded the slowest growth since the early 1990s, outside of the pandemic period. Data released since the last policy meeting in November has also reflected softer than expected outcomes. While underlying inflation remains high at 3.5% as of the September quarter, the RBA expressed confidence that inflation is gradually moving towards its target of 2.5%, although it expects this to occur no earlier than 2026.

These considerations have influenced market perceptions, resulting in Australian swap yields falling by more than 10 basis points at the front end, with bets for a rate cut in February surging. After initially benefiting from positive sentiment due to China’s directives, the Australian dollar has reverted back to recent lows around AUD/USD 0.64, despite efforts by RBA Governor Bullock to mitigate these expectations.

Market, Sentiment, Trading