Markets
After the much-anticipated Powell interview Tuesday evening, rates momentum, especially in the US, eased. Hammer-like patterns back then emerged on the technical charts, suggesting a short-term correction was imminent. That happened yesterday, be it orderly. US yields fell between 4.2-6.2 bps. The 10y tenor outperformed following a very strong $35bn auction. The economic calendar was empty except for several central bank speeches. NY Fed Williams said rates currently are barely restrictive and may need to go higher if inflation remains elevated or financial conditions loosen. Fed governor Cook vowed to stay the course until inflation is back down to the 2% target. Waller in his speech focused on the need to keep rates higher for longer, adding he isn’t seeing signals of inflation coming down as quickly this year as some (i.e. the market) believe. ECB’s de Guindos struck a similar tone. The vice-president thinks markets are too optimistic about the inflation trend. European bonds underperformed USTs. German yields added a few bps. Despite the yield engine having stalled, equity markets traded in the defensive. Wall Street dropped up to 1.7% (Nasdaq). This risk-off environment supported the dollar with the DXY eking out a small gain to 103.40. EUR/USD’s attempt to recapture 1.0735 failed with the pair closing lower (1.071) in the end. The British pound strengthened ahead of Bank of England governor Bailey’s testimony before parliament scheduled for today. EUR/GBP slipped through 0.8897 support (January interim high) to finish at 0.8875. Oil prices extended a bounce back from the $80/b support to $85.09.
Asian stock markets trade mixed this morning. China outperforms by adding >1% which is seen related to rising speculation about a possible rate cut in the second quarter. It helps explain the currency outperformance of some important trading partners including Australia and New Zealand. The US dollar trades generally softer. Scandinavian currencies advance as we go into the Riksbank’s first policy meeting of the year. Else on the agenda were the postponed German inflation figures for January which came in at 0.5% m/m and 9.2% y/y. It means an unexpected further deceleration from December. The German Bund future shoots higher in a first market reaction. The US auctions $21bn of 30-y bonds. The 10y one yesterday suggests current yield levels attract solid investor demand. Another stellar auction will also dampen US yield’s upside from a daily perspective. For the dollar and EUR/USD, we think equity sentiment is probably the dominant factor. Central bank policymakers including ECB’s Villeroy, Nagel and de Guindos are scheduled to speak. We expect them to hold the official policy line.
News Headlines
The January 2023 RICS (Royal Institution of Chartered Surveyors) UK Residential Survey results continue to highlight a muted market, with new buyer demand, sales, fresh listings, and prices all reported to be on a downward trend. At a national level, the latest net balance for new buyer enquiries slipped to -47%, down from a reading of -40% last month. It’s the ninth consecutive decline and the lowest level since April 2009. Respondents continue to see a pull-back in the volume of fresh listings coming onto the sales market (-14%). Looking at the next twelve months, the sales outlook does not appear to be quite as downcast as before, with the net balance moving to -20% compared to a much weaker reading of -42% in December. Looking across to the lettings market, tenant demand continues to increase (+43%). On the issue of supply across the rental market, around 64% of survey participants are of the opinion that Build to Rent will play a bigger role in the product mix brought to market going forward.
The National Bank of Poland kept its policy rate unchanged yesterday at 6.75%. The press statement much resembled the previous one. The Council assessed that the weakening of the external economic conditions, together with monetary policy tightening by major central banks, will curb global inflation and commodity prices. The deterioration of global economic conditions also hampers Polish GDP growth. Under such circumstances, the hitherto significant monetary policy tightening by NBP will support a decline in inflation in Poland towards the NBP inflation target. In the short term, inflation will remain high though and the return to target gradual. Upside inflation risks remain with the NBP ready to intervene in the FX market to limit fluctuation which are inconsistent with monetary policy (i.e. avoid a too weak zloty). EUR/PLN yesterday fell from 4.75 to 4.7350 in a move more related to the approval of legislation with the aim of unlocking EU funds.
