Markets
The risk-on rally stuttered for a second day straight yesterday. Lower-than-expected US January inflation (1.4% y/y; both headline and core) forced markets to ponder the reflation trading theme (higher equities, higher yields) they have been betting on for quite some time now. Stocks ended mixed (US) or in the red (EMU). US Treasuries suffered a kneejerk blow but it did not stop there. A decent US $41bn 10-yr auction brushed aside immediate worries that (expected) inflation would have dented investor demand, supporting USTs further. A third whammy to yields came from Powell. The Fed chair said the job market remains a long way from full recovery, noting employment is still some 10 million below February 2020 levels. It will require more than an accommodative monetary stance (not even thinking about withdrawing Fed policy support) for it to achieve maximum employment he added in a wink to the US Treasury Department. Powell also downplayed a possible rise in inflation triggered by a burst in spending after the pandemic ends, saying it probably won’t be large neither sustained. The US yield curve bull flattened with yields down 0.9 bps (2-yr) to 4 bps (30-yr). Bunds outperformed with yields up 1.9 bps at the very long end. Peripheral spreads were mixed. Italy (-2bps) again outperformed. FX markets trade muted with the dollar holding a tight sideways trading range. EUR/USD finished unchanged at 1.212. USD/JPY also closed stable at 104.59 even as the BoJ is mulling to offer guidance of even deeper negative rates. Sterling was one of the better performers. EUR/GBP fell from 0.877 to 0.876 in a move that mainly highlights the pound’s constructive momentum.
Asia offer little guidance today with key markets closed. China is closed for a week in observance of the Lunar New Year holidays. Japan and South-Korea have the day off as well. Core bonds are going nowhere. The dollar, for what it’s worth in low-volume trading, trades heavy.
Today’s economic data is limited to US jobless claims. Consensus expects a continued gradual decline from 779k to 760k as states reopen amid slowing infection rates and the vaccine rollout. Continuing claims should hit 4420k (down from 4592k). The EC publishes new economic forecasts. A slew of ECB speeches are due (Villeroy, de Guindos, Knot). Unlike previously, speech subjects (sustainable finance) suggest they won’t touch on the euro or the possibility of another rate cut. After failing to take out key technical levels, yesterday’s CPI and Fed communication and solid US auctions ” with another (30-yr) one upcoming later today ” US yields might be in for a minor correction lower in the short term. This would keep a lid on the dollar as well. Sterling meanwhile holds neatly within the downward EUR/GBP channel and is nearing next resistance at around 0.875 (61.8% retracement Feb ’20 low ” March ’20 high). A break lower cannot be ruled out. That would bring EUR/GBP 0.867 in focus.
News Headlines
Brazilian lawmakers approved legislation to give the central bank full operational independence. Until now, the central bank head technical was a member of the Government’s Cabinet and approved by the President. The central bank’s main objective is to meet its inflation target. Secondary objectives include a.o. ensuring the stability of the financial system and promoting full employment. The central bank head will have a four-year term and will be legally protected from being fired due to disagreements with the government on monetary policy.
US President Biden and Chinese President Xi Jinping had their first telephone call since Biden took office. Biden indicated that he has ‘‘fundamental concerns about Beijing’s coercive and unfair practices, its crackdown in Hong Kong, reported human rights abuses in Xinjiang, and increasingly assertive actions in the region, including toward Taiwan”, according to the White House Statement. Xi said that both nations should avoid confrontation. At the same time, the Chinese President stressed he considers Hong Kong, Xinjiang and Taiwan to be matters of sovereignty and territorial integrity which he hopes the US will approach cautiously
