Markets
Friday’s trading session revolved around US payrolls and EMU inflation. The former showed below-consensus job creation but faster-than-expected wage increases (0.6% m/m). Armed with the separate, strong household survey (unemployment rate fell to 3.9%), markets concluded it’s enough to justify the Fed’s accelerated normalization pace. Wall Street’s choppy trading ended up with losses. The Nasdaq (-0.96%) underperformed. US bond yields rose 3 bps (5y) to 4.1 bps (10y). The 5y trades north of 1.5% for the first time since January 2020. The 10y tested resistance at 1.77% but didn’t confirm the technical break going into the weekend. Inflation in the eurozone unexpectedly rose from 4.9% to a record high of 5% but left few traces on markets. German yields rose 0.6 to 2.1 bps across the curve in a move inspired by the US post-payrolls. The German 10y yield closed at a new recovery high of -0.04%. Peripheral spreads widened a basis point or two. Greece hugely underperformed (+11 bps; anticipating supply?). The dollar once again failed to capitalize on UST underperformance. EUR/USD even jumped off 1.129 support to finish at 1.136. USD/JPY closed below 116. EUR/GBP copy pasted moves in EUR/USD. It gained marginally to end the week at 0.836. That said, the pair is still trading near a two-year low. Cable (GBP/USD) tested the 1.36 big figure.
Asian Pacific trading is so quiet you can hear a pin drop. Japanese markets are closed for Coming-of-age Day. Other stock markets trade mixed, lacking guidance. We do retain an interview by ECB Schnabel (see headline below) over the weekend. Core bonds open the week with new losses, building on the existing trends and suggesting a higher open for both US and German yields. It may set the tone for the remainder of the day given the empty economic calendar. The latter only gets moderately interesting this week with the US in focus. CPI (expected at 7%+ y/y) and the Fed’s Beige Book are due on Wednesday. Retail sales and consumer confidence (U. of Michigan) are up for release this Friday. In the meantime we’re watching two key rate levels: 1.77% for the US 10y and the (symbolic) 0% for the German variant. The USD is retracing some of it’s counterintuitive steps on Friday and strengthens vs most major peers. With the euro at the same time in a soft spot, EUR/USD eases to 1.133, confirming the weeks-long gridlock in the low 1.13 area. The UK receives an industrial update later this week but we doubt it will force a breakthrough in EUR/GBP. Sterling currently already discounts a 83% chance for a February back-to-back rate hike. The 0.8277 December ’19 low in any case is an important EUR/GBP support zone.
News headlines
The International Monetary Fund (IMF) published a blog post warning emerging economies to prepare for Fed policy tightening. The threat is especially there in case broad-base US wage inflation or sustained supply bottlenecks boost prices more than expected, triggering faster Fed rate increases and tighter global financial conditions. Such developments could come with a slowing of US demand and trade and may lead to capital outflows and currency depreciation in emerging markets. The IMF offers some policy advice especially for emerging markets with high public and private debt, FX exposures and lower current account balances. The tone of the message is clear: act now on inflation, strengthen policy frameworks and reduce vulnerabilities or risk having to face greater economic/financial turbulence later on.
ECB governing council member Schnabel warned that the greening of the economy poses measurable upside risks to the central bank’s baseline inflation projection over the medium term. She turns the argument around saying that there are instances in which central banks will need to break with the prevailing consensus that monetary policy should look through rising energy prices so as to secure price stability. Fossil fuel prices will not only stay elevated but might even keep on rising if the world steps up its fight against climate change in order to meet the goals of the Paris climate change. Scenarios which would trigger a faster ECB response are one where higher energy prices filter through in elevated inflation expectations and a create wage-price spiral and one where policies to tackle climate change (eg carbon tax and compensation measures) increase inflationary pressures.
