Markets
Markets felt at ease with the Fed refraining from more immediate monetary easing but vowing to remain accommodative for quite some time to come. Equities shrugged off disappointing data, such as today’s US jobless claims (an unexpected increase to 885k vs. 818k expected), under the assumption that in a worst case scenario the Fed will step in. The US housing market meanwhile continues to steam ahead, a sector chair Powell yesterday declared as basically healed from the pandemic. Both housing starts (1547k) and building permits (1639k, highest level since 2006!) beat consensus. Congressional leaders are close in trashing out a nearly $900bn stimulus deal. Europe’s von der Leyen tweeted December 27 as the date for the first vaccinations on the continent. Stocks inch about 0.5-1% higher with again new record highs for several US indices. Core bonds gain ground as well. US yields decline 2.3 bps at the long end of the curve with the decline solely born by real yields (-3.5bps to -1.07%, lowest since September). German yields fall 1-3 bps with the belly of the curve outperforming the wings.
The US dollar lags the G10 scoreboard once again as rising inflation expectations and declining real USD yields bite. EUR/USD trades near intraday highs around 1.225, up from 1.22. The trade-weighted dollar DXY fell below support at the 90 big figure (89.85 currently). DXY is eying the lower bound of the downward trend channel. USD/JPY gets whacked, currently testing the 103 big figure after forfeiting support at 104 a few days earlier. The Bank of England voted to keep policy rates stable at 0.1%. It also decided unanimously to maintain the target for the stock of government bond purchases at £875bn after raising it last month (+£150bn). It did however extend its TFSME programme, via which it supports cheap lending to the real economy, with six months until October 31 2021. The BoE expects the recent restrictive measures to weigh on growth in Q42020 and Q12021 before the rollout of vaccines to have a positive impact on activity and inflation further out next year. The central bank adds however that uncertainty remains on the prospect of how vaccination will affect the immediate economic behavior of households and businesses. About Brexit, the BoE said that the nature of, and transition to, the new trading arrangement with the EU adds to the overall uncertainty without expressing its view in one way or another. Its projections do assume a trade deal is in place by January 1. The neutral-wait-and see approach had little impact on sterling. EUR/GBP ventured briefly below 0.90 in the run-up to the policy statement only to return north again in a mostly technically driven move. Sterling holds rather resilient. Hopes for a Brexit deal soon (EU’s Barnier sees one possible tomorrow) run high.
News Headlines
The Norwegian central bank kept policy rates unchanged today. The central bank warned the recent coronavirus measures will weigh on activity in the current quarter but is optimistic the vaccine breakthrough will bring the economy faster to its pre-pandemic level going forward. Growth forecasts for 2020, 2021 and 2022 were revised upwardly. This faster-than-expected closing of the output gap also pushed forward the Norges Bank’s expected start of policy normalization (1% in 2023 vs 0.5% earlier). EUR/NOK is testing support near 10.50.
The Swiss National Bank kept its policy rate unchanged at -0.75%. Markets focus turned to the central bank’s interpretation of the Swiss franc after the US labeled the country “FX manipulator”. The SNB stands its ground, calling CHF “highly valued” and being prepared to step up interventions if necessary. Updated growth forecasts point at a 3% GDP contraction this year, followed by a meagre 2.5%-3% recovery in 2021. Inflation remains miles away from the 2% target, rising from -0.7% this year via 0% in 2021 to 0.2% in 2022. The Swiss franc adds to yesterday’s losses with EUR/CHF gradually moving to first resistance at 1.0872.
