Markets
Upcoming key US inflation data didn’t prevent a constructive start to the new trading week. Equities gradually gained traction during European and US dealings. The economic forecasts of the European Commission lowered this and next year’s inflation outlook to 5.9% (from 6.1%) and 2.5% (from 2.6%). 2023 growth was upwardly revised to 0.9% from 0.3%. Lower inflation and higher growth evidently are good news for risk assets, but the revision was no big surprise. Still the Euro Stoxx 50 gained 1.03%. US indices closed higher between 1.1% (Dow) and 1.4% (Nasdaq). Bond markets showed a mixed picture. In the end, the US curve again inverted further with the 2-y yield unchanged but the 30-y ceding 4.3 bps. German short term yields (2y & 5y) added about 2 bps. Longer maturities were little changed. On FX markets, the dollar struggled as risk sentiment stayed mild. DXY failed to try a new attack on last week’s 103.96 correction top (close 103.34). USD/JPY closed at 132.41 (from 131.28), but this was mainly yen weakness as markets scaled back expectations for a real hawkish BoJ policy change under new governor Ueda.After setting a new ST correction low early in the session, EUR/USD also captured a better bid in line with equities to close the day at 1.0723. EUR/GBP declined quite sharply intraday. The pair tested last week’s low near EUR/GBP 0.8825, but a break didn’t occur (close 0.8836).
This morning, Asian equites again underperform compared to the US and Europe yesterday (gains of <1.0%, China little changed). US yields are easing marginally and so does the dollar (DXY 103.15; USD/JPY 132.0; EUR/USD 1.0735). Of course, today it’s all counting down to this afternoon’s US January CPI report. The monthly dynamics for headline CPI is expected to reaccelerate to 0.5% (from 0.1%) bringing the Y/Y measure at an expected 6.2% (from 6.5%). Core inflation is expected at 0.4% M/M and 5.5% (from 5.7%). The data might be an indication that easy part of the deceleration in inflation might be behind us. An upward surprise (which we see as possible) could reinforce the Fed-rhetoric to bring the policy rate well above 5.0% and keep it at an elevated level for longer. US short-term yields already discount a Fed peak policy rate close to 5.20%. In case of upward surprise, the key question is whether this will trigger a further inversion of the US yield curve or whether expectations for interest rates to stay high for longer will also lift yields at the belly of the curve. First resistance for the US 5y and 10-y yield respectively stand at 4.03% and 3.90%. Signs of stubbornly high inflation, annex a hawkish Fed reaction also could support recent USD rebound. For EUR/USD first support comes in at 1.0680/56. UK labour market data this morning came out strong with a monthly job growth of 107k and weekly earnings ex-bonus at 6.7% from 6.4%. Sterling jumps higher in a first reaction with EUR/GBP again closing in on the 0.8825 support area.
News Headlines
The Biden administration yesterday announced the sale of another 26 million barrels of oil from its Strategic Petroleum Reserve. These will be released on the market in April and will take the SPR to a new low dating back to 1983. The US sold an unprecedented amount of 180 mln barrels from the reserves last year to counter surging energy prices after the Russian invasion. This time however, the sale is actually required by 2015 legislation. US lawmakers have used SPR sales as a way to finance spending proposals, often through mandates that the sales occur years in the future, as is the case now. But with SPR at historically low levels, the move draws criticism and the Energy Department itself has sought to stop it. The US WTI oil reference after the announcement dropped from intraday highs around $80.5/barrel to just north of $79.
