Markets
The repositioning/sell-off on core bond markets yesterday simply built on the established dynamics even without high profile eco news. A bit different from recent dynamics, the rise in core yields this time didn’t really translate into a substantial further flattening of the yield curves. The US yield curve rose between 5.7 bps (5y) and 4 bps (30y), with real yields (10y) still responsible for the lion’s share of the rise. The US treasury’s $50bn 3y bond sale met with strong end investor demand (above average bid-cover of 2.45). However, the successful sale didn’t really change the intraday dynamics. The German curve bear steepened with yield changes between -1.1 bp (2y) and +6.2 bps (30y).
In an address before the finance committee of France’s national assembly, ECB Villeroy assessed that markets probably went too fast in their reaction after last week’s ECB policy meeting. He signaled that the bank won’t engage in a monetary tightening and won’t go beyond a neutral orientation. Even comments from ECB Lagarde on a gradual ECB approach on Monday didn’t impress markets.
Intra-EMU spreads versus Germany continued their widening trend with Italy underperforming (+3 bps). Greek bonds slightly outperformed (-5 bps) coming on the back of a sharp underperformance post-ECB. European equities mostly showed modest gains, but strong earnings inspired US equites to close near session highs with the Nasdaq closing at + 1.28%.
The dollar slightly outperformed despite the risk rally. USD/JPY (close 115.55) is nearing 115.68 short-term resistance. EUR/USD closed at 1.1415 (from 1.1442). However, for now the technical picture hasn’t really deteriorated. Sterling profited only modestly from a further sharp rise in UK yields. EUR/GBP closed at 0.8429.
Asian markets join the constructive close on WS yesterday evening with gains on average between 1% and 2%. The rise in US yields is taking a breather. However, we don’t draw any firm conclusions, with US bond investors still looking forward to tomorrow’s US CPI release.
Today, the US and EMU eco calendar is again extremely thin. Comments from BoE chief economist Pill and Fed’s Mester are worth looking at. Also keep an eye at the sale of $37bn of US Treasuries (10y). A pause after the recent steep yield rise is possible, but for now we don’t see any trigger for a sustained correction as central banks probably will have to act swiftly to address persistent inflationary risk.
With the Fed and the ECB now looking in the same direction, the odds for the EUR/USD cross rate also look more balanced. A short-term trading range might develop between 1.13 and 1.1484. The yen still underperforms. A break of USD/JPY above 115.68 would open the way to the January/multi-year top of 116.35. EUR/GBP is holding resilient. The downside looks better protected with first support in the 0.8350 area.
News Headlines
Hungary is doubling down on a pre-election spending spree. It will pay out the largest pension bonus so far today, worth €1bn. It follows a higher-than-expected annual increase in pension payments from January, costing the country an annual €550 million. Families with children will get a personal income tax rebate later this month totaling €1.7bn and workers younger than 25 won’t have to pay any. These are a few of the additional spending measures announced since the 2022 budget was published last summer. They come ahead of a general election in April, PM Orban’s toughest since he took office in 2010 after an unusual alliance by six opposition parties to oust him.
The National Bank of Poland raised rates yesterday by an expected 50 bps to 2.75%. The economy is strong, rising an estimated 5.7% in 2021. The labour market continues to tighten, leading to a marked increase in average wages. Inflation hit 8.6% y/y in December. Rising household income, energy prices and ongoing supply chain disruptions will keep inflation elevated also in 2022. Monetary policy tightening should decrease price growth over time but there are risks that it will run above the 2.5% (+/- 1%) target over the policy horizon. This implies further tightening at the current pace is likely. The NBP welcomes PLN-appreciation, saying in an added sentence that it would be consistent with the current direction of policy. The Polish zloty finished the day marginally stronger at EUR/PLN 4.528..
