Markets
The US dollar extends this week’s losses. It’s the worst performing currency, even losing out against JPY and CHF in spite of the risk rebound of the past days. The trade-weighted dollar now changes hands at 96, exactly where it was trading ahead of last week’s hawkish FOMC meeting. In between, it set a new recovery high at 97.27. The same goes for EUR/USD which is back at 1.13+ after dipping to 1.1121 on Friday. There’s no strong driver for this USD-reversal, but it does say something on underlying sentiment. From current levels, it will be hard for USD to put in place any new significant upleg. With regard to EUR/USD, it’s also remarkable that the rebound higher wasn’t stronger. Especially taking into account this week’s huge increase at the front end of EUR rate curves. The Euribor 3-month forward curve trades positive in yield terms from March 2023 onwards. We’ve seen over the past months that FX only really starts profiting when central bank step up their efforts in making policy rates less negative. The probability that the single currency gets the backing from the ECB tomorrow remains low, even if we got the umpteenth upside inflation surprise today. Headline inflation accelerated to a new EMU high of 5.1% Y/Y (from 5% Y/Y) while they anticipated a base-effect triggered slowing. Core inflation remains above the ECB’s 2% inflation target, declining less than expected (2.3% Y/Y from 2.6% Y/Y vs 1.9% Y/Y forecast). We continue to believe that the ECB eventually will make a policy turn (eg at the March meeting with new inflation forecasts), accelerating the tapering of net asset purchases in order to free space to start hiking policy rates this year. German Bunds again underperformed US Treasuries. German yield changes range between -1.2 bps (30-yr) and +2.4 bps (5-yr). The US Treasury curve steepens with yield changes varying between -1.8 bps (2-yr) and + 0.7 bps (30-yr). The US eco calendar contained a disappointing January ADP employment report after the stellar December numbers (776k). US firms cut 301k jobs, while consensus expected 180k net job growth. A surge in Omicron-infections is to blame. Details showed a broad-based decline with negative outliers in services. More specifically for leisure/hospitality (-154k jobs) and trade/transportation/utilities (-62k). Payrolls in manufacturing and construction fell by 21k and 10k respectively. European and US stock markets currently record gains of around 0.5%. EUR/GBP treads water between 0.83 and 0.8350 for the past five session in anticipation on tomorrow’s BoE meeting. A rate hike is discounted, but is the BoE willing to deliver more hikes than previously communicated? UK money markets are already betting on 5 25 bps moves this year.
News Headlines
US Treasury announced it will trim bond sales for the February-April quarter. The second cut on a row reflects declining funding needs after going all in at the height of the pandemic. Total bond issuance over the next three months is $111bn lower compared to the previous fiscal quarter. Volumes decline across the curve. The deepest cutbacks will be for the 7-year notes which will see total issuance $9bn lower at the end of the current quarter compared to the end of the previous three months (January). Issuance in the 2y-3y-5y segment over the same period will have declined by $6bn each. Treasury will ramp up supply in the 10y and 30y tenors this month by $1bn compared to the last auction before cutting back in March (-$3bn each). It will keep that amount stable at the end of the fiscal quarter in April.
OPEC+ agreed to normalize output, sticking to the script outlined in 2021. Production should increase by some 400k barrels a day. Should, but not necessarily will because some cartel members experience difficulties to keep up with production due to outages or general capacity constraints. In January, OPEC+ also agreed to add 400k barrels per day. In reality though, total additional supplies only amounted to 210k, Bloomberg reported based on information from officials. Data presented to an internal committee on Tuesday showed an overcompliance to production cuts by OPEC of 122%, meaning they are cutting far more than required.
