Markets
European markets more or less took a breather yesterday following a vibrant start to the new year. Price action intensified once US traders joined the party. US Treasuries extended losses while main equity indices gained up to 2.5% (Nasdaq). The narrative that the Democratic blue sweep would hurt (big) tech via higher taxes and additional regulation, doesn’t really feed through yet. A strong December US non-manufacturing ISM (57.2 from 55.9) added to the decline in US Treasuries. The US yield curve bear steepened with yields adding 0.1 bp (2-yr) to 4.3 bps (10-yr). The US 30-yr yield (1.87%) is closing in on the 1.92% March top. Weakness in UST’s remains a theme this morning following comments by voting Atlanta Fed governor Bostic. He reiterated that the Fed could slow down its asset purchases sooner than expected. In December, they unanimously vowed to keep the current $120bn monthly pace (of which $80bn US Treasuries) until significant progress toward the employment and inflation goals is made. Bostic believes that coming into summertime or going into fall, the US economy could be rolling pretty well, if the vaccine distribution happens in an appropriate way. Under such economic scenario, the Fed could slow purchases as it aims for progress, and not reaching, the goals. Bostic’s view is a minority one so far, but this debate will be a very live one throughout the rest of 2021.
The US dollar bounced away from sell-off lows. Underlying drivers of the US yield increase again showed an equal contribution of both higher inflation expectations and higher US real rates. The trade-weighted dollar failed to retake the 90-mark. The positive risk climate propelled USD/JPY from around 103 to 104. A weekly close above 103.90 could be a first signal that short term prospects turn slightly brighter for the greenback. EUR/USD closed at 1.2272 from an 1.2327 open and is close to tumbling out the upward channel since early December. However, the proof of the pudding remains in the eating and US December payrolls are today’s huge dessert. Consensus expects a 50k net job gain which would (nearly) end the positive run since April. This week’s earlier data (employment components in ISM and ADP employment change) and the third wave in the US (combined with local lockdown measures) suggest even risks for disappointing despite the rather low consensus bar. In such scenario, it’s probably hard to see the dollar’s comeback already going much further.
Volatility in sterling ebbed away after a December-month filled with ups and downs. There’s no need in explaining why. EUR/GBP’s reaction function in this first week is a close copy of the one in EUR/USD, though the dollar slightly outperforms the UK currency. EUR/GBP closed at 0.9046 yesterday from an 0.9058 open.
News Headlines
Bloomberg reports that Italy is planning to make full use of its share of EU recovery funds while also tapping other EU funding to spend some €222 bn. The plan – which has been boosted to ease tensions with the junior coalition party Italia Viva –includes €32 bn in spending on infrastructure, €19.7 bn in health and €70 bn in green investments.
The US Trade Representative’s office said the 25% import tariffs on French goods worth $1.3bn annually would be suspended indefinitely. The levies were announced in July in retaliation for France’s digital tax the US says will harm its tech companies and would normally go in effect on Wednesday. Explaining the decision, USTR said it has 10 other investigations running into similar taxes in India, UK and other countries and pursues a coordinated response.
Germany’s Health Minister Jens Spahn is considering putting himself forward to stand as chancellor for Merkel’s coalition during the federal elections in September, Bild reported. Next week, Merkel’s CDU is to pick a new leader. The winner is usually touted as the next chancellor but someone else could stand as well. Spahn jumped in the polls over his handling of the first pandemic wave although faces criticism today for the slow vaccine rollout.
