Markets
US December payrolls shifted the needle of US money markets from two to only one additional 25 bps Fed rate cut this year. Headline job growth (+256k vs +165k expected) was the best since March, came with barely any revision to previous months’ numbers and come together with decline in the unemployment rate (4.1% from 4.2%) and consistent wage growth (+0.3% M/M & 3.9% Y/Y). From a momentum perspective, we might be talking about a rate hike as the next Fed move if Wednesday’s January US CPI data manage to beat consensus for a 0.3% M/M headline increase (2.9% Y/Y) and a 0.2% M/M core inflation pace (3.3% Y/Y). Inflation expectations in the January University of Michigan consumer survey (released last Friday as well) in any case showed a significant uptick for both short-term (1-yr; 2.8% to 3.3%) and long-term (5-10 yr; 3.3% from 3%) inflation expectations. The short term gauge matched the highest level registered in 2024 while the long term metric was the highest since 2008. US Treasuries sold off in bear flattening fashion. Daily changes varied between +1.7 bps (30-yr) and +13 bps (3-yr). Technical resistance (5%) hampered a more pronounced increase at the very long end of the curve. The US 10-yr yield took out the 2024 top at 4.73% in its 7 bps march. German Bunds and UK Gilts joined the broad market move though obviously at a slower pace. German yields rose by 1.3 bps (30-yr) to 5.4 bps (3-yr) while UK yields added 2-4 bps across the curve. The US dollar extended the early 2025 momentum with the trade-weighted greenback (DXY) touching 110 for the first time since November 2022. EUR/USD closed at 1.0244 (from 1.03) and has its eyes at key support (1.0201) this morning. That corresponds with 62% retracement on EUR/USD’s 2022-2023 comeback. Losing that level implies a return to parity (or below). Sterling cedes more ground with EUR/GBP taking out 0.84 on fiscal and stagflationary worries. UK December inflation numbers (also on Wednesday) could inflict more pain on the UK currency. US stock markets lost 1.5% last Friday’s as the continuous rise in real yields bites. Today’s eco calendar is empty. The stealth sell-off pace in core bonds shows no signs of slowing down at the moment. Keep a close eye on oil prices as well with Brent crude prices rallying from $77/b to $81/b since US president Biden on Friday announced most aggressive sanctions on Russia’s oil trade as of yet.
News & Views
China’s trade balance grew the most on record in December. It added $104.84bn thanks to a double digit export increase vs a 1% rise in imports. The sprint into the end of the year suggested companies have been frontloading exports ahead of widely expected import tariff increases on Chinese goods under a second Trump presidency. Exports to the US indeed rose 15.7% y/y in December, the highest reading since February 2024. Shipments to the Asian area and Europe grew 19.2% and 8.8% respectively. Exports over the whole of 2024 rose 5.9% y/y and climbed to $3.58tn. Imports over the same period increased 1.1% y/y to $2.59tn. That resulted in a record high trade surplus of $992.1bn. Trade has been one of the key drivers of Chinese growth with private consumption in particular showing few signs so far of a hoped-for rebound. China’s yuan trades little changed around USD/CNY 7.33.
IMF director Georgieva told reports end last week the Fund will forecast steady global growth and continuing disinflation in its updated World Economic Outlook due January 17. While the US economy was doing better than expected, high uncertainty on president-elect Trump’s trade policies added headwinds to the global economy. The IMF in October projected 3.2% global growth in 2025. Georgieva also said overall interest rates were expected to stay “somewhat higher for quite some time”, driven in particular by the US developments. Inflation was moving closer towards the Fed’s 2% target but with data showing a stable labour market, the central bank is in a position to wait before lowering policy rates further. Trends diverge in different regions though, the IMF chief added. Growth was expected to stall somewhat in the EU and to weaken a little in India. Brazil in the meantime would face somewhat higher inflation while China was seeing deflationary pressure and ongoing challenges with domestic demand.
