Markets
“We’ve explored the effective lower bound, but we haven’t found it yet”, dixit Klaas Knot. The Dutch ECB governing council member made the comments in reference to the euro when asked about last year’s rise against the dollar. “That is something we of course monitor very, very carefully. It’s one of the factors we take into account when arriving at our assessment of where inflation is going.” Knot’s comments come on a remarkable moment – one week after an ECB meeting without any reference to the single currency. Additionally, EUR/USD trades below levels seen around the turn of the year. Knot partly downplayed the effective possibility of a rate cut by pointing at the interplay between asset purchases, TLTRO’ and forward guidance which together determine already very accommodative monetary conditions. Whatever Knot’s (un)intended (?) reasons, he did manage to “talk” the euro down with EUR/USD sliding towards 1.21. EUR/GBP tested last week’s low at 0.8830. We add that verbally intervening against the currency (by central bankers) is a very dangerous game which in the past more often than not backfired via an even stronger currency. Talking about it without putting the money where the mouth is, hurts your credibility which de facto remains a central banker’s most important asset. Additionally, we believe that the ECB’s tolerance level for the EUR/USD cross rate is probably located somewhere around 1.30, which remains a long stretch from current levels. The impact of Knot’s comments on the front end of the European yield curves remains modest at best. We – and markets – are very skeptical against the possibility of an additional deposit rate cut, something the ECB forewent at the height of the Covid-19 pandemic and an experiment no other central bank decided to try last year. The German yield curve bull flattens with yields shedding 0.6 bps (2-yr) to 1.4 bps (30-yr). 10-yr yield spreads vs Germany widened by around 2 bps. We think these moves (and part of today’s dollar strength) are more related to risk aversion on European stock markets which trade over 2% lower with technical pictures at risk of deteriorating short term. US Treasuries outperform German Bunds with yields dropping by 0.8 bps (2-yr) to 3.4 bps (10-yr).
Focus turns to the FOMC tonight. Some Fed governors floated the idea to slow down asset purchases (currently $120bn/month) as early as the end of the year. This view is a minority one, though Fed members seem to agree that the combination of US fiscal stimulus from the Biden administration and the vaccination campaign, will drive a very strong H2 economic recovery. Slowing down purchases will become topic of debate later this year. However, Fed Chair Powell will do his utmost best to keep the genie in the bottle for at least a couple of months. US Treasuries might profit further with the US 10-yr yield moving to the 0.98% support level. Dollar gains might be capped.
News Headlines
The price of several agricultural commodities remains upwardly oriented. Corn jumped to the highest level since mid-2013. The benchmark corn future in Chicago rose to $5.42. Prices have already risen 12% this year. Record Chinese buying of the crop is an important driver behind the move as the country tries to ease domestic price pressure and replenish stock piles. Insider reports indicate that Chinese demand might persist. Wheat also rebounds after a brief correction last week, nearing a multi-year top. Soy shows a similar picture due to supply issues at major producers (Argentina and Brazil). Protracted price rises might translate into higher food price inflation globally.
Orders for US durable orders in December showed a mixed picture. The broader measure of orders for goods seen as lasting for at least three years rose 0.2% M/M versus 1.2% in November and 0.9% expected due to a slump in aircraft/parts orders. Still, the series showed on eighth consecutive rise amongst others supported by the broader expansion in the goods producing sector. Core capital goods orders (excluding aircraft and military) rose 0.6% M/M. Capital goods shipments non-defense ex aircraft, a proxy for investment in the GDP release, rose 0.5%, close to expectations. The first estimate of the US Q4 GDP will be released tomorrow. A rise of 4.2% annualized is expected.
