Markets
A hawkish hike and a hawkish hold. The Bank of England raised rates by 25 bps to 0.50%, initiated the natural roll off of the balance sheet and will actively start selling from the corporate bond portfolio. Four out of the nine MPC members voted for a 50 bps increase. Inflation is now expected to peak at more than 7% vs 5% previously. If the BoE would follow the market policy rate path (peak rate at 1.5-1.75% by mid-2023), prices would still increase by more than 2% in 2023 and only ease back to/below target in 2024. (Further) tightening policy is necessary to kill off inflation that’s eating away UK incomes/spending and is weighing on growth. UK yields rallied 9.8 to 11.5bps higher. The short end underperformed. Markets pulled forward the next policy milestone, expecting 1% policy rates already in May. This would mean the BoE starts actively selling government bonds.
EUR/GBP briefly hit support at the 0.828 zone but then the ECB came and shocked. There were no changes in policy but there were in the tone. There is unanimous concern on inflation and their upwards risks. Lagarde finally admitted we’re in a different situation and said it needs to be reassessed based on the data. This will happen at the March meeting when inflation forecasts will most certainly be raised to north of 2%, allowing for a quicker end of net buying and a rate hike later this year. Euro area money markets raised their tightening bets and now anticipate more than 40 bps of rate increases. It jolted the front end of the European swap curve by 14.1-15.7 bps! The long end added 2.3 (30y) to 8.9 bps (10y). German yields rose in similar fashion. European yields pulled those in the US 4.2-6.3 bps higher across the curve.
The euro shot up, ignoring the equity selloff in both Europe (-2%) and the US (almost -4%!). This was the trigger the common currency has been waiting for all this time. EUR/USD surged from 1.1304 to 1.144. EUR/GBP closed above 0.84 (from 0.8327). EUR/JPY: from 129.37 to 131.54. And the list goes on.
Japanese bond markets this morning are inspired by the ECB (see below). Asian stocks are surprisingly resilient given moves in Europe and the US yesterday. The German bund continues to underperform USTs. The euro builds on yesterday’s momentum. EUR/USD is nearing a three-month high (1.1456).
US payrolls are today’s headliner. Omicron may have weighed on employment in December. Consensus expects a rather meagre 125k job growth after the disappointing ADP job report earlier this week. Developments on European markets require at least as much attention though. We’re keeping a close eye at market positioning, both in European rates and the currency, now the dust has settled a bit. The picture in EUR/USD definitely turned for the better. First meaningful resistance in EUR/USD is located at 1.1526 but that’s a bridge too far for the time being. The recent surge in European yields may also dial back a bit going into the weekend.
News Headlines
All eyes are on Bank of Japan governor Kuroda after yesterday’s dramatic ECB press conference. He must be the last man standing when it comes to ultra-easy monetary policy. He testified before parliament this morning, stressing that Japanese inflation is low even excluding temporary factors. BoJ member Wakatabe yesterday also warned against premature tightening and even keeps easing options open. Whatever the BoJ says, Japanese interest rates started moving in the other direction. Japanese yields add up to 3 bps this morning with the belly of the curve underperforming the wings. The Japanese 5y yield briefly turned positive for the first time since 2016.The food price index of the UN Food and Agricultural Organization rose 1.1% in January to 135.7, challenging peak levels of 2011. A monthly 4.2% rise in vegetable oils was an important driver, mainly due to supply side constrains. The FAO is concerned the impact of these constraints won’t ease quickly. Dairy prices (+ 2.4% m/m) also increased for the fifth consecutive month due to reduced availability exports from Western Europe and expected lower production from Oceania. The cereal index increased marginally (0.1%), as did the meat index. Sugar was the only subindex to decease (3.1% M/M). Persistent high/rising food prices suggest further upside risks for inflation, especially in developing countries.
