- Rates: Core bonds recover in absence of inflation uptick
Core bonds regained some vigor since wage inflation (last Friday), US CPI inflation (Tuesday) and PPI numbers (yesterday) didn’t deliver the feared overshoot. We think that can remain the case this week with positive trade vibes also fading. US retail sales are a wildcard given upside risks to consensus. - Currencies: Dollar looking for new trading narrative
The dollar lost a few ticks yesterday as core bond yields eased. Even so, the EUR/USD trading range remains firmly in place. Today’s US data, including the retail sales, might cause some intraday USD swings, but we don’t see a trigger for a clear directional move. Sterling avoided big losses despite a soft CPI and with markets discounting a January BoE rate cut.
The Sunrise Headlines
- Wall Street eked out small gains yesterday (+0.1-0.3%) following a volatile session as the US and China sealed the Phase one trade deal. Asian markets drift sideways this morning. (+0.7%) Korea outperforms.
- Under the partial trade deal, China commits to do more to protect IP while it also contains an FX manipulation clause. China would also spend some $200 billion to close the trade imbalance. The US keeps existing tariffs put as leverage.
- Philly Fed Harker said the US central bank is still mulling to introduce a standing repo facility in the wake of the September money market turmoil but should be wary not to became the primary provider of liquidity.
- French labor unions have called for new strikes across the country next week, planning a major event on January 24 despite president Macron having backtracked on raising the retirement age as part of the pension overhaul.
- WH advisor Kudlow said the US administration is continuing efforts for a new tax-cut plan. Details will be released in the Summer but depend on Republicans regaining the House and maintaining the Senate after the November elections.
- The US House voted yesterday to send the articles of impeachment to the Senate. Senate Majority leader McConnell said the trial will begin not sooner than Tuesday and will probably last several weeks.
- Today’s economic calendar contains US December retail sales, jobless claims and the January Philly Fed business outlook. The ECB releases its December meeting accounts. Its president Lagarde is giving a speech tonight
Currencies: Dollar Looking For New Trading Narrative
Dollar looking for new trading theme
The dollar lost modest ground yesterday as investors took a guarded approach awaiting the signing of the phase one US-China trade deal. Equities hovered near recent top levels, but core bond yields eased. The latter often is a negative for the dollar. US eco data were mixed with limited impact on trading. The trade-weighted dollar declined during most of the session, closing at 97.23. EUR/USD slightly outperformed (close at 1.1150). The setback in USD/JPY was modest (close at 109.90). Overnight, Asian equites are trading mixed. WS yesterday challenged the all-time record levels but gains were modest. The US-China trade truce should be discounted and (FX) markets are looking for a new theme. Moves in bonds and in the major FX cross rate modest this morning. The yuan is holding relatively strong (USD/CNY 6.89). USD/JPY is trading close to, mostly marginally below the 110 barrier. EUR/USD maintains yesterday’s’ gains, hovering near the 1.1150 level.
Later today, the US, the eco calendar is busy with the import prices, the Philly Fed business outlook, retail sales, the NAHB housing index and jobless claims. Retail sales take centre stage. December sales are expected solid (0.4% M/M control group). Meeting expectations should be possible after a mediocre November report. Even so, we assume that the dollar is slightly more sensitive to a negative rather than a positive surprise. A stabilisation/limited decline in core yields tends to weigh on the dollar more than on the likes of the euro. Global equity sentiment currently also doesn’t provide clear guidance for USD trading.
From a technical point of view, EUR/USD last week dropped temporarily below 1.11, but 1.1066 support survived on soft payrolls. EUR/USD 1.1066 remains our first downside reference. A rebound above 1.1180 would call off the ST downside alert. Still, a ST break beyond 1.1250 looks far from easy.
Sterling temporarily suffered from much softer than expected UK CPI data yesterday. UK yields nosedived and markets currently discount a more than equal chance (about 65%) of a Jan 30 BoE rate cut. Even so, the damage for sterling could have been much bigger. EUR/GBP closed the session only marginally higher at 0.8551. There are few data in the UK today. Even after yesterday’s sterling resilience we see little sterling upside ST as the rate cut debate develops further
EUR/USD: USD losing a few ticks, but established range stays firmly in place.
