Markets
The US 10-yr yield took out the psychologic 1% mark for the first time since March. Long term US yields added around 10 bps since the start of the year. The move accelerated yesterday following the release of a stellar US December manufacturing ISM. The ISM unexpectedly increased from 57.5 to 60.7, the highest level in more than 2 years. Details showed improvement in orders, production and employment/ Supply chain bottlenecks and labor shortages prevent an even stronger output at manufacturing firms. The prices paid index rose to 77.6, mainly due to higher prices for raw materials. More or less simultaneously with the ISM, Brent crude prices rallied from $51.5/b to $54/b following a surprise large Saudi production cut ($1mn b/d in February and March) to offset some OPEC+ members’ demands for a production hike starting February. A final factor is the Georgia US Senate race. At least one of the two available seats will likely go the Democratic though both remain officially too close to call. Early results in any case added to the vibe that the Democratic blue sweep would be completed, putting them in charge in the White House and Congress. Reflationary spirits are the final element to add the bear steepening of the US yield curve. At the time of writing, US yields are 2 bps (2-yr) to 12 bps (30-yr) higher compared to Tuesday morning. The German yield curve bear steepened as well over that time period though with long term yields only 3 bps higher. 10-yr yield spread changes vs Germany narrowed by up to 4 bps (Greece).
Higher US yields failed to lift the dollar. The commodity rally and the reflation theme (higher inflation expectations, subdued real yields) hurt the dollar for most of 2020 and that trend doesn’t seem to change, at least for now. The trade weighted dollar is stuck in the low 89-area with EUR/USD making another attempt to take out 1.23. Policy makers in China and Japan start being fed up with the ailing dollar which triggers outsizes gains for the likes of the yuan (“slow appreciation”) or the yen (“need for FX stability”). USD/CNY and USD/JPY respectively trade at 6.45 (lowest since 2018) and 102.75 (lowest since 2016 apart from March 2016 liquidity squeeze)
US equity futures trade with small losses this morning. The onus for stock markets switched from the reflation boost from a Democratic sweep to the higher taxes and more stringent regulation that could also come along. Asian stock markets are mixed. Today’s eco calendar contains US ADP Employment Change and Minutes of the December FOMC meeting. Focus will turn to the Georgia Senate race though and to the joint-session in US Congress where electoral votes will officially be counted. Republican House and Senate delegates could turn to slowdown tactics to avoid the unavoidable: VP Pence officially calling Joe Biden as the next US President.
News Headlines
Saudi Arabia pledged to voluntarily cut an additional 1 million barrels a day of oil output in February and March. The move came unexpected as Russia had been pushing for a supply increase of about 500 000 barrels/day for February. Instead, both Russia and Kazakhstan are allowed a combined 75 000 barrel output rise in the next two months. Brent oil prices surged beyond $53/b.
Fed voting member Evans called for a possible overhaul of US financial regulation, saying the low-for-long interest rate environment poses risks to financial stability that should not be addressed by increasing rates or paring back the asset purchases. On inflation, he said 3% “would not be so bad” as long it is not accelerating uncontrollably.
US security agencies including the FBI and the NSA have said that Russia was likely behind the cyber-attack on SolarWinds, contradicting earlier statements by US president Trump. The IT company’s software had been hijacked, leading to some 18 000 of its government (US Commerce, Energy and Treasury departments) and private-sector clients to have been exposed.
