Markets
This week’s eco calendar is as chilly as temperatures are outside. It leaves market participants guessing on what card to play next. By default, they resort to the reflation theme but those trades are loosing dash short term. The outcome is more or less directionless trade within existing boundaries. US January CPI inflation didn’t repeat the European trick (massive upward surprise & rebound) and was somewhat disappointing. The headline release stabilized at 1.4% Y/Y with the core gauge down from 1.6% Y/Y to 1.4% Y/Y. With more and more spotlights focused on inflation expectations and actual inflation, the releases did trigger a small uptick in US Treasuries and a crack in the dollar. The tradeweighted buck set a new February low around 90.20. EUR/USD tested 50% retracement of the 2021 correction lower (1.2150), but a break higher didn’t occur yet. USD/JPY returned back to 104.50, reversing some earlier yen weakness. JPY suffered from rumours that the Bank of Japan may consider taking steps at its March policy review that clarify to markets it has room to deepen negative interest rates to support the economy (eg communication, tweaks to tiered reserves system). US Treasuries thus outperformed German Bunds today, despite the upcoming $41bn 10y Note sale. Part of the explanation could be Fed Chair Powell’s address to the Economic Club in New York. In US Treasury Secretary Yellen he finally found someone who is answering his longstanding call for fiscal policy to complement a maxed-out monetary policy. Yellen and Fed-members (eg Barkin, Kaplan this week) for now reject growing critic that their expansionary policies will be hugely inflationary. We expect Powell to pull the employment card as well tonight, stressing the need for accommodation and by no means resurrecting the tapering debate. The US yield curve bull flattens in a daily perspective with yields dropping 0.5 bps (2-yr) to 1.7 bps (30-yr). The German yield curve is broadly unchanged compared to yesterday. 10-yr yield spread changes vs Germany vary between -2 bps (Italy) and +2 bps (Portugal). Other markets that put up strong performances recently stalled as well. Brent crude hovered listless above $61/b with US equity markets (+0.5%) outperforming main European indices (+0.2%). Sterling slightly outperformed other majors with EUR/GBP changing hands at 0.8755 compared to an 0.8770 open.
News Headlines
The Swedish Riksbank kept policy rates steady at 0% and expects them to be there at least until 2024Q1. The central bank intends to spend the remainder of the SEK 700bn bond buying programme (SEK 450 bn) by the end of the year, mainly on covered bonds, and reinvest maturing securities at least until 2022. More policy easing seems unlikely with the new and improved growth and inflation forecasts painting a rosier economic picture. EUR/SEK retreated to 10.04 on krone strength before paring losses.
The ECB is a long way from worrying about inflation, its president Lagarde said today, adding the central bank is very far away from the 2% inflation target. The ECB is looking through the January uptick, as they don’t see prices robustly developing to their 2% aim over the medium term. Lagarde reiterated that favourable financing conditions are the bank’s compass and will keep policy easy to that extent. She urged governments to keep fiscal support at least through the end of the year.
Norwegian inflation came in higher than expected in January, with the headline figure jumping from 1.4% to 2.5% y/y (1.8% expected). Core inflation slowed less than expected from 3% in December to 2.7% (2.4% consensus). Details showed a sharp increase in housing compensating for a fall in clothing and footwear. The Norwegian krone extends its recent gradual strengthening course to the euro to EUR/NOK 10.22.
