Markets
Powell’s hawkish pivot before the US Senate yesterday still rippled through markets today. By burying the long-standing “inflation is transitory” narrative, shifting policy priorities from the labour market to inflation and backing a faster taper process, the Fed chair effectively paved the way for a quicker start of the hiking cycle. This rate lift-off could well coincide with the new QE shelf date end Q1 2022. Markets do not price in such a scenario yet but moves yesterday and today are going in that direction. The US yield curve bear flattens with changes at the short end ranging from +2.2 to 4.1 bps. Yields in longer tenors recoup some of yesterday’s whammy with growth fears (Omicron, impact from Fed’s accelerated tightening cycle) at the base of the move yesterday. The US 10y rises 3.4 bps, the 30y adds 2.8 bps. Strong US data may have contributed, comforting some that the economy/labour market is resilient enough to withstand policy normalization. The unofficial ADP jobs report showed employment rose a strong 534k, the third month straight of 500k+. Services as usual accounted for the lion share of job gains (424k). Leisure & hospitality added 136k jobs, professional & business services came in second with 110k, followed by trade, transportation & utilities (78k). The ADP chief economist in a comment did leave some room for uncertainty, saying it is too early to tell if the Omicron variant could slow down the jobs recovery in coming months. European yields mainly followed US peers, lacking other drivers. The European 10y swap yield tested strong 0.1% support in early trading but is currently 1.8bps higher vs. yesterday’s close. German yield changes range from 1.7-3.3 bps across the curve. Peripheral spreads widen 1 to 3 bps with the exception of Greece (-6 bps).
The euro in recent days was in pretty good shape. Heavy risk-off even supported EUR/USD via narrowing (short-term) interest rate differentials. Today is the other way around. Risk sentiment today is considerably better (oil prices up 2.5%, stocks rise 2% and more) but the pair now has to cope with faster rising/recovering US yields. It results in a tie between the euro and the dollar at an unchanged 1.134. The Japanese yen holds up surprisingly well given gains on stock exchanges and in core bond yields. USD/JPY and EUR/JPY barely budged at 113.05 and 128.18 respectively. The same goes for the euro vs the Swiss franc: EUR/CHF is unable to leave behind recent lows just north of 1.04. Sterling trades mixed vs G10 peers but does eke out a small gain against the euro. EUR/GBP slowly drifts south towards the 0.85 big figure. Cable bounces from 1.33 to 1.334.
News Headlines
The CBRT for the first time since 2014 intervened in the FX market to address the ongoing sell-off of the lira. The CBRT justified the move as an act to fight ‘unhealthy price formations’. The amount of the interventions is made public within 2 weeks. Even so, net reserves of the CBRT are limited and it is doubtful that interventions will be big enough to address the issue of a persistent negative real (policy) yield and a lack of confidence in the CBRT’s unconventional policy approach. After a brief intraday gain of about 8 %, the lira currently trades little changed against the euro (EUR/TRY 15.10) and only marginally stronger against the dollar (USD/TRY 1.1332). At least for now, the charts show no trend reversal yet. Historic peak levels in EUR/TRY and USD/TRY are still within reach.
Reuters, referring to sources close to the ECB, reported that a number of ECB policy makers is pondering the scenario of delaying the decision on a part of the ECB stimulus plans beyond the December 16 policy meeting. By postponing the decision on what will happen after the end of the PEPP programme in March to the February 3 meeting, the ECB hopes to know more about the impact of Omicron, both on the economy and on inflation. Executive Board members are said not to be in favour of this approach as it could upset bond investors looking for a clear guidance for the ECB.
