Markets
Marginally softer than expected US CPI yesterday caused markets to leave a bond short-positioning that had been built since early December. The release also muted a developing market debate as to whether the Fed at some point could be forced to consider rate hikes again. The market again moved toward December guidance from the Fed dots, considering two additional 25 bps rate cuts this year rather than just one that was discounted after Friday’s strong US payrolls. Today, the next reality check came from the state of US domestic demand, with the December US retail sales. At 0.4% M/M for the headline figure (from an upwardly revised 0.8%) and control group sales at 0.7% M/M, the report was close to expectations suggesting ongoing solid consumer demand at the end of the year. Other data evidence showed a massive beat in the Philly Fed business outlook (44.3 from -10.9) while US weekly jobless claims left recent low readings, rising from 203k to 217k. US yields before the US data release tentatively tried to reverse part of yesterday’s decline, but this move was blocked. US yields currently add 2-3 bps across the curve. German/EMU yields are trading between unchanged at the short end, but the long end resumes its steepening bias (+3bps 30-y Germany). The account of the December 11-12 ECB policy meeting confirmed that the MPC sees room for gradually further easing as the disinflation process remains well on track, with also less inflationary pressures seen from wages and profit margins. UK gilts outperform with yields declining up to 4 bps (2-y). After softer than expected UK December inflation data yesterday, lackluster monthly December output data (industrial production -0.4% M/M) are convincing markets that the BoE has an ever stronger case to reduce policy restriction already at the early February meeting. European equites are extending yesterday’s rebound (EurosStoxx 50 +1.3%). For now, the goldilocks combination of softer CPI and ongoing solid demand/retail sales hardly helps further gains in US equities (S&P 500 +0.1%). Brent oil is holding most of yesterday’s jump higher ($81.9/b).
After holding up well despite the sharp decline in US yields yesterday, the dollar also shows resilient today. DXY gains from 109 to 109.25. EUR/USD declines, albeit modestly, to 1.0275. The yen this morning outperformed on headlines that the BoJ might be moving ever closer to a rate hike next week. USD/JPY briefly dropped to the 155.25 area, but the pair again trades near 156 on USD strength currently. After a relief rebound on global market easing yesterday, sterling today incurs further losses with EUR/GBP rebounding higher (0.843) and cable returning below 1.22. Sterling interest rate support might narrow sooner and faster than expected before yesterday.
News & Views
The Bank of England published its quarterly Bank liabilities and its Credit condition surveys today. The BLS showed lenders reporting increasing total funding volumes in the three months to end-November, but those were expected to decrease again in the current quarter. This hides the divergence between higher retail funding and lower “other” funding. The cost of funding of both increased and are expected to continue doing so. The credit conditions survey pointed out that the availability of (un)secured credit to households and the overall availability to the corporate sector all increased and is expected to increase further. Lenders also reported better demand for secured lending for house purchases, for unsecured lending and for corporate lending from SME’s. Overall unsecured lending spreads were the only ones that widened in Q4. Only default rates on secured loans for households increased slightly.
The National Bank of Poland kept its policy rate as expected unchanged at 5.75%. The policy statement will be released later today with NBP governor Glapinski delivering his press conference tomorrow. Earlier today, the NBP published its own core CPI series. Underlying price pressures unexpectedly weakened in December (-0.1% M/M) with the annual figure dipping from 4.3% to 4% instead of the forecasted 4.2%. CPI excluding administered prices stabilized at 3.2% Y/Y with CPI excluding the most volatile prices ticking lower from 5.3% to 5.2%. The Polish zloty loses marginally ground today at 4.2675, with data strengthening the 4.25 technical support area.
