Markets
The decline in US bond yields following Friday’s soft US wage data and services ISM is gradually petering out. Still, markets stay highly sceptic on the Fed’s mantra that rates will (have to) be raised to 5%+ and stay there for some time. That said, technical support levels in the US 2-y (4.13% area vs .4.24% currently) and 10-y yield (3.40% vs 3.58% currently) for now continue to provide downside protection. There were again few data releases in EMU and the US today. The only one really worth mentioning, the US NFIB small business confidence, dropped sharply from 91.9 to 89.8. Small business owners turn ever more uncertain as poorer business conditions are eroding profits. Price prices are easing. The recessionary narrative this time didn’t trigger further yield declines. US yields currently are rebounding between 5 bps (30-y) and 3 bps (5-y). At a Riksbank conference on central bank independence, Fed Powell in general said that the Fed as an independent central bank can take necessary/unpopular measures to slow growth, but he didn’t elaborate on current policy. Later today, the US Treasury will start is monthly refinancing with a $40 bn sale of 3-y Notes. German Bunds again slightly underperform Treasuries with yields rising between 6 bps (5-y & 10-y) and 4 bps (2-y). At the same Riksbank conference, ECB Schnabel said that ‘interest rates will have to rise significantly at a steady pace to reach levels that are sufficiently restrictive to ensure a timely return of inflation to our 2% medium-term target’. Intra-EMU 10-y government bond spreads narrowed marginally today, with Greece outperforming (-4bps). The Kingdom of Belgium placed € 7bn of a 10-y (June 2033) bond priced at MS + 10 bps, with books reported above € 51 bn. The Brent oil price gains marginally, trading near $80/b. Equities mostly suffer modest losses (EuroStoxx -0.3%, S&P little changed).
On FX markets, the dollar stays in the defensive, even as risk sentiment turns less positive. EUR/USD (1.074) is testing the 1.0735/87 resistance area, with 1.0912 marking 50% retracement from the decline between early 2020 and the correction low end September last year. However, the move probably also contains a pinch of underlying euro strength. The trade-weighted DXY index, after touching a new correction low below 103 yesterday, is still struggling not the fall below this big figure. USD/JPY is going nowhere (132 area). A more cautious global sentiment and markets pondering the BoE’s reaction function in case of a recessionary scenario (softer comments from economist Pill yesterday) is again pushing EUR/GBP (0.884) closer to the 0.8867/77 resistance.
News Headlines
After hitting a peak of 7.5% in October last year, Norwegian headline inflation continued to abate in December. Price pressures decelerated from 6.5% to 5.9% (0.1% m/m), less than the 6.1% (0.3% m/m) expected. An underlying gauge excluding tax changes and energy unexpectedly rose though, from 5.7% to 5.8%. That’s just one tenth of a percentage below the series high of 5.90%, underscoring the stickiness of core inflation. It also took the Norges Bank by surprise, which had penciled in no change of core inflation for last month. However, it’s unlikely to dramatically change the central bank’s assessment that one more 25 bps rate hike to 3% (on January 19) will suffice to bring inflation back to target as the economy cools down. The Norwegian krone reacted stoic on the release. EUR/NOK is trending marginally higher towards 10.68 in a technically insignificant move.
Hungary’s Finance Ministry State Secretary Toth is optimistic that the government by the end of June can unlock billions of euro funds blocked by the Commission until several milestones regarding the rule of law set by the EU are met. At the same time he added that the country is in a very relaxed situation with respect to the need of FX. Hungary sold a combined $4.25bn in dollar bonds (5y, 10y and 30y) last week, taking advantage of a global bond rally that pushed yields lower since the start of the year. Bids exceeded $12bn. Central-European sentiment improving was also visible in the forint with EUR/HUF depreciating to the lowest levels since September last year. The pair today does nudge higher though stays sub 400. Poland’s head of public debt department at the Finance Ministry today said that the country also plans to be present in euro and dollar bond markets this year, seeking to broaden the investor base.
