Markets
The big reflation trade took a moment to catch its breath yesterday. Circumstances were ideal with no important data scheduled to trigger abrupt market moves. Equities finished broadly unchanged after erasing earlier losses, both in the EMU and the US. Core bond yields traded choppy and below recent (recovery) highs. The US kicked off its bond sales with the 3-yr tenor. The auction went smoothly but didn’t impact markets. US Treasuries edged higher at the long end of the curve, sending rates marginally lower driven by the real yield component. German yields ended a volatile trading day flat. Peripheral yield spreads widened just 1 bps. The dollar traded on the back foot even as risk sentiment was fragile. EUR/USD took out intermediate resistance around 1.208 to finish the session north of 1.21 again. USD/JPY ended in the 104.5 area. DXY (90.44) gave up next support at 90.51 (23.6% retracement Sep’20 – Jan ’21). Sterling staged a similar trading pattern as Monday, erasing early European gains to close flat near the 0.877 opening. The move suggests the pound’s momentum remains fairly resilient.
Overnight news flow isn’t very exciting, part two. Underwhelming Chinese January CPI (-0.3% y/y despite another 1.6% y/y food price increase) grabs the most attention. Core measures hit deflation territory as well with a steep drop in services inflation being the key driver (-0.7% y/y). Chinese PPIturned positive (0.3% y/y) for the first time since the pandemic struck amid the recent strong rise in commodity and food prices. Chinese stock markets outperform Asian-Pacific peers ahead of a week-long close for Lunar NY during a constructive trading session. Core bonds aren’t going anywhere. FX markets trade extremely muted with the greenback holding to or slightly extending yesterday’s losses. USD/CNY is nearing the lower bound of the 2021 sideways trading range. EUR/USD ekes out a small gain to 1.2125.
The economic calendar contains US CPI today. Consensus lies at 1.5% y/y for both headline and core measures. Inflation is gradually becoming a topic in markets thinking with US market-based inflation expectations reaching ever higher levels. For today however, the reading probably won’t have a dramatic impact. We more look forward to the US 10-yr bond sale later today. Will the recent rise in long rates suffice to offset the increased inflation (and perhaps sovereign credit) risks markets see to the fiscal and monetary abundancy? A smooth auction would probably ease such fears. This could solidify the 1.2% (10-yr) and 2% (30-yr) technical resistance areas, but only for the short term. It could keep the USD in a less beneficial position as well, especially against the false technical bullish breaks at end of last week. The next EUR/USD resistance situates around 1.22. Sterling holds in a tight trading range and we expect no major moves today either. UK investors are probably focusing at the GDP data later this week.
News Headlines
The jobless rate in South Korea jumped in January from 4.5% to 5.4%, the highest level since 1999.. The number of people employed declined in January by 982 000 compared to the same month last year as measures to contain a third corona wave dented economic activity, in particular in the services sector. An indicator measuring the unemployment rate of young people between 15 and 29 even jumped to a record 27.2%. Still, the Korean won (USD/KRW 1107,50) rebounded further this morning on broad USD softness after a correction in January and early this month.
Consumer sentiment as measured by the Westpac-Melbourne Institute rebounded 1.9% in February after a 4.5% setback in January. In a broader perspective, the index is again nearing the all-time high reached in December, indicating extraordinary confidence. The index of house price expectations in the survey rose 6.5% reaching in seven-year high. The Aussie dollar stabilized in the AUD/USD 0.7740 area this morning after recording solid gains over the previous three days.
