- Rates: Change in tone by Fed chair Powell
The stretched core bond rally fell prey to profit taking last Friday following a stellar US payrolls report and a dovish verbal turn by Fed chair Powell. He suggested readiness to alter policy to address downside eco risks. Will his genuflection be sufficient to end a volatile market period? Supply heats up this week which might weigh on bonds. - Currencies: dollar ignores strong payrolls as Powell calls flexibility in Fed policy
The dollar profited only temporarily from very strong payrolls on Friday as Fed’s Powell comforted markets as he committed to a flexible Fed policy. A positive risk sentiment and a perceived softer Fed might remain a tentative USD negative. However, EUR/USD is holding in the 1.12/1.15 trading range, for now.
The Sunrise Headlines
- US equities spurred higher on Friday with gains up to 4% on a strong job report and soothing words of Fed chair Powell. Asian equities opened this week’s trading in green as well, with Japanese indices outperforming.
- The US and China start face-to-face trade talks today as a US delegation, led by Deputy Trade Representative Jeffrey Gerrish, has arrived in Beijing. Topics on the agenda are intellectual property, agriculture and industrial purchases.
- US President Trump said his demand for a wall along the US-Mexico border could be satisfied by a steel barrier instead of a concrete wall. In the meantime, the US government shutdown heads into its third week.
- China’s top planning agency has approved $125bn in rail projects across the country in the past month, as it continues fiscal spending to counteract its economic slowdown.
- The Brexit theatre wakes up from its hibernation as politicians return to Westminster today. PM May is still seeking to win over critics of her Brexit deal, as a crucial vote in Parliament is planned for next week (Jan 15?!).
- Japan’s services sector slowed in Dec. with the Nikkei PMI Services dropping to 51.0 from 52.3 in Nov., caused by poor weather and weaker demand growth. The Composite PMI declined to 52.0, down from 52.4 a month before.
- Today’s economic calendar covers only the ISM Non-Manufacturing Index (Dec) in the US, as other data is cancelled due to the government shutdown. The EMU calendar remains rather empty, with only retail sales catching our eye.
Currencies: Dollar Ignores Strong Payrolls As Powell Calls Flexibility In Fed Policy
Dollar eases on Powell’s flexibility call
There were plenty of eco data on both sides of the Atlantic on Friday, but the market focus was on the US payrolls and on the interview of Fed’s Powell (together with its predecessors Bernanke & Yellen). EMU data (PMI’s and CPI) were again soft but left hardly any traces on FX markets. EUR/USD hovered near the 1.14 level. The December payrolls were very strong with both job growth and wage growth beating expectations. US yields and the dollar rose, but USD gains remained modest given the magnitude of the payrolls’ beat. EUR/USD dropped to the mid 1.13 area. US gains were reversed as the headlines of Powell’s interview flashed on the screens. Powell maintained a positive view on the economy, but stressed that the Fed could be flexible if necessary, both in its interest rate policy and in managing the balance sheet. His comments triggered an outright risk rebound and propelled EUR/USD back to pre-payrolls levels. The pair closed the session little changed at 1.1395. USD/JPY was marginally supported by the rise in US yields but gains were small given the sharp risk rebound on other markets. The pair closed the session at 108.51 (from 107.68). This morning, Asian equities are joining the post-Powell risk rebound from Friday, but gains as modest compared the US rally on Friday. Even so, the dollar remains slightly in the defensive. EUR/USD is changing hands in the 1.1420 area. USD/JPY is drifting back lower in the 108 big figure. The yuan also rebounds (USD/CNY < 6.85). Later today, most US data releases will be delayed (government shutdown) but the non-manufacturing ISM will be published. A modest decline from 60.7 to 59.0 is expected. Considering the steep decline in the manufacturing measure, risk are probably to the downside. The Sino-US trade talks are a wildcard. The jury is still out whether Powell’s comments have eased market uncertainty. Even so, Powell signalling more Fed flexibility is a cautious USD negative. The modest rebound of USD/JPY on Friday also suggests some underlying USD caution. For now, the EUR/USD 1.12/1.15 trading range looks still solid, but a retest of the 1.15 barrier might be on the cards.
The risk rebound on global markets also supported sterling on Friday, with EUR/GBP closing well below 0.90. This week, the political debate on Brexit will resume ahead of a new Brexit vote that is scheduled for Jan 15. Despite recent cautiously positive GBP-momentum, we remain cautious on sterling as long as the uncertainty on the Brexit process remains as misty as it is now.
EUR/USD: USD ceding ground as Powell admits on Fed flexibility
