Markets
It finally happened: the German 10y yield turned positive for the first time since April 2019. For six hours. The most important European benchmark rate gapped at the open to 0.004% in a catch-up move with a late-session US yield sprint. After hitting an intraday high of 0.02%, yield gains slowly evaporated as the European session evolved. It is currently trading at an, admittedly barely, negative 0.008%. Symbolic/technical breaks like these usually have to meet with swift follow-through price action in order to get confirmation but that’s not the case yet. Bunds nevertheless underperform USTs. The German curve bear steepens with changes ranging from +0.6 bps (2y) over +1.2 bps (10y) too +2.3 bps (30y). Peripheral spreads vs. the German 10 year widen slightly, with Greece (+2 bps) underperforming peers for a second day. US yields fall 1.4 bps (2y) to 0.8 bps (10y), bull flattening the curve after a hefty two-day selloff. With calm returning to the (US) bond market, equities caught a break as well. European stocks advance about 1%. In the US, the tech-heavy Nasdaq outperforms with gains of 0.9%. Oil prices extend gains for a fourth day. Brent ($88.04/barrel) is closing in on the $90 barrier. The International Energy Agency said the oil market looks tighter than earlier thought as omicron is having less impact on overall demand than initially feared. Adding to recent price increases, was Tuesday’s attack on oil-exporter UAE infrastructure as well as an explosion that day that temporarily knocked out an important crude pipeline running from Iraq to Turkey.
It’s relatively quiet on the major FX markets. The dollar is under marginal selling pressure, providing EUR/USD an opportunity to recover some of yesterday’s sharp losses. The pair is currently changing hands at 1.134, slightly up from 1.132. USD/JPY and the trade-weighted DXY hover near yesterday’s closing price around 114.50 and 95.62 respectively. The Norwegian krone is leading the major FX scoreboard thanks to oil. EUR/NOK eases to 9.93. Central European currencies were visibly relieved after a few tougher days on strong core bond increases and dollar strength. The forint takes the lead over regional peers, sending EUR/HUF down to 355.77. EUR/CZK declines (CZK strengthens) to 24.31, just shy of the previous 2020 lows around 24.25. The zloty is also returning to recent highs against the euro of EUR/PLN 4.52. Sterling is having a good day, not caring one single bit about UK prime minister Johnson’s uncertain political fate. Instead, inflation in December again turned out to be higher than expected and pushed money markets for the first time to fully price in a back-to-back rate hike on February 3 by the Bank of England. The headline figure rose from 5.1% y/y to 5.4%, the fastest pace since 1992. Core inflation unexpectedly quickened from 4% to a three-decade high of 4.2%. EUR/GBP is hitting a new 2-year low at 0.8318. 0.8277 serves as solid support.
News Headlines
Canadian headline expected fell by 0.1% on a monthly basis, but rose as expected from 4.7% Y/Y to 4.8% Y/Y in December, the highest reading since 1991. The Bank of Canada’s preferred core inflation gauge, the trimmed mean, unexpectedly accelerated from 3.4% Y/Y to 3.7% Y/Y. The Bank of Canada has a 2% inflation target surrounded by a 1% tolerance band. Over the past months, the BoC gradually reduced its net asset purchases to zero. Consensus expected the governor Macklem and his colleagues to start a tightening cycle in March/April, but an outside risk opened up that already conduct a first rate hike at next week’s policy meeting. Canadian money markets discount a total of 5 25 bps rate hikes this year. The loonie continues outperforming today. The oil price rally also delivered a significant push in the back of late. USD/CAD trades near the sell-off lows below 1.25. EUR/CAD set a minor new cycle low below 1.4164, the lowest level since early 2017.
