Markets
US December CPI numbers avoided a feared acceleration and triggered a cross-asset relief move. The big reaction was more about repositioning rather than the actual data. Headline CPI (0.4% M/M, 2.9% Y/Y) was in line with consensus while core CPI (0.2% M/M, 3.2% Y/Y) was only just below expectations. US yields lost 9.6 bps (30-yr) to 15.2 bps (7-yr) with the belly of the curve outperforming the wings. US money markets moved back to two rather than one more 25 bps Fed rate cut this year, with a first one discounted by June. NY Fed Williams, Richmond Fed Barkin and Chicago Fed Goolsbee all welcomed the monthly price report, but added that this doesn’t alter the story line set out back in December. It will take more time to bring inflation on a sustainable path to 2%, meaning restrictive policies are still necessary. The goldilocks combo of (strong) payrolls, (slightly) lower CPI, lower real rates and strong Q4 (US banks) earnings propelled US stock markets 1.65% (Dow) to 2.45% (Nasdaq) higher. US retail sales can today extend those positive market vibes. The US dollar was the odd one out, holding strong despite an initial move lower. EUR/USD closed at 1.0289 from 1.0308 and with an intraday top at 1.0354. Two elements are at play. First, European bond yields followed the US move with EU swap rates shedding up to 12 bps (belly). Second, event risk looms large with US markets enjoying a long weekend (MLK Day on Monday Jan 20) during which president-elect Trump will be inaugurated. The Japanese yen continues outperforming on more talk that the BoJ will effectively hike policy rates next week. USD/JPY approached 155 for the first time since mid-December.
Bank of England rate-setter Alan Taylor stroke a dovish tone in his first public speech since joining the central bank in September of last year. He sides with the more benign inflation cases made by the BoE in which price pressures fade relatively quickly. Under this view, the economy might face adverse demand pressures potentially on many fronts while supply is less perturbed. The BoE’s reaction function should then be one of lowering policy rates rather quickly to neutral, which Taylor estimates at around 2.75% in this scenario: “we are in the last half mile on inflation, but with the economy weakening it’s time to get interest rates back toward normal to sustain a soft landing”. Accelerated rate cuts means perhaps 125 bps to 150 bps in the coming year. This view contrasts sharply with UK money markets currently discounting a cumulative 50 bps of rate cuts by the end of the year. A first one could be implemented as soon as February given the 6-3 split vote in December and in the wake of yesterday’s below-consensus inflation numbers. BoE Taylor was one of the dissenters at that December policy meeting together with his colleagues Ramsden and Dhingra. They voted in favour of a 25 bps rate cut rather than sticking with unchanged policy rates. UK Gilts yesterday outperformed with UK yields losing 14 to 16 bps across the curve. EUR/GBP tested first resistance at 0.8448, but a break didn’t happen, at least not for now. GBP/USD holds near the sell-off lows (1.22) with support lingering around 1.2037 (Oct 2023 low). We stick to our bearish view against sterling.
News & Views
Canada set up a draft list of some C$150 bn of US-manufactured products eligible for import tariffs in case President-elect Trump decides to impose levies on Canadian goods, Bloomberg reported citing an official familiar to the matter. The exact items on this initial list are not disclosed yet and it would only come into force if the next US administration moves first. But its scope is in any case much bigger than during Trump’s previous term, when Canada slapped tariffs on some C$17bn of US exports to the country. Canadian imports from the US in the 12 months to November amounted to C$487bn, meaning the draft list covers nearly a third of the products’ value.
The central bank of South Korea unexpectedly kept its policy rate unchanged at 3% this morning in a 6-1 vote. Governor Rhee said that based on growth alone, the central bank would have cut rates. Inflation at 1.9% is also close to the BoK’s 2% target. All members except Rhee kept the door open for reductions in the next couple of months. But in considering all variables including financial stability risks the BoK today decided otherwise. Rhee was referring to the dramatic slide in the South Korean currency to the lowest level against since 2009 in the wake of president Yoon Suk Yeal’s failed martial law attempt early December. The economic fallout of the political crisis is probably bigger than expected, the governor said, and downside risks to the 2025 outlook have increased. Today’s status quo was also underpinned by uncertainty surrounding Trump’s first policy measures after his inauguration next week. USD/KRW trades little changed around 1456.7. The multi-year high end-December stood at 1486.85.
