Markets
Positive risk sentiment colored European trading, but dynamics changed somewhat in the US session. A positive interpretation of a disappointing headline US manufacturing ISM (see below) didn’t help. The US Labour Department said that there were 10.6mln job openings at the of end of November, down from 11mln+ a month earlier. The figure remains historically very high though. The simultaneously published quits rate rose to 3%, matching the record set in September and pointing further towards tightness on the US labour market. These figures didn’t help sentiment either. Main European equity indices still closed with gains to the tune of 1%. The big three US indices parted ways with the industrial Dow gaining 0.6%, the S&P ending flat and the tech-heavy Nasdaq underperforming (-1.33%). The mood swing put an intraday floor below sliding US Treasuries while also rescuing an ailing Japanese yen. The US yield curve steepened again with daily changes ranging between -0.9 bps (2-yr) and +4 bps (30-yr). The US 10-yr yield closes in on the 1.7% resistance area, which serves as a final (minor) hurdle ahead of the 2021 top of 1.77%. The underlying real yield returned above -1% to its highest level since the end of October. German yield changes varied between -1.1 bp (2-yr) and +0.5 bps (30-yr). EUR/USD traded mostly just below the 1.13 big figure after the blocked test of EUR/USD 1.1383 resistance around the turn of the year. USD/JPY closed north of 116 for the first time since January 2017. (European) positive risk sentiment and higher US (real) rates gave the Japanese currency a double blow. UK yields’ catch-up move higher following the January 3 UK Bank Holiday unleashed sterling with EUR/GBP setting a new recovery low at 0.8335. Key support stands at 0.8282.
Asian risk sentiment is soured this morning by Nasdaq’s performance with South Korea, China and HK losing over 1%. The spill-over towards bonds and FX remains fairly limited. Today’s eco calendar contains US December ADP employment change and Minutes of the December FOMC meeting. Consensus expects 410k net job growth from the ADP report. Minutes could for once be more interesting. The Fed in December decided to double the monthly QE tapering pace from January onwards from $15bn to $30bn. With QE now scheduled to end in March, focus is already turning to winding down the balance sheet. Discussions started in earnest last month, with the Fed hinting that the 100% reinvestment phase won’t last as long as it did after 2014 (+- 3 year) given the stronger labour market and higher inflation. Fed governor Waller backed running off the balance sheet by summer. St. Louis Fed Bullard also advocates shrinking holdings shortly after ending net purchases. If the debate about removing liquidity from the market becomes an issue, it could further weigh on US Treasuries (via real rates!) while also hurting risk sentiment. Such context could is USD-supportive even if the greenback can’t really generate momentum for the moment.
News headlines
The National Bank of Poland raised its policy rate as expected from 1.75% to 2.25%. Inflation printed at 7.8% Y/Y in November and is expected to exceed 8% in December. Compared to previous meetings, the NBP took a more balanced approach on the sources of inflation. External factors (rise in commodity and energy prices, supply disruptions) remain an important driver, but the economic recovery and better demand are also in play. An expected continuation of favourable labour market conditions contributes to the risk that inflation might run above the NBP target (2.5% +-1%) during the policy horizon. This leaves to door open further interest rate hikes. The zloty strengthened from EUR/PLN 4.58 to 4.565, but this move mainly occurred before the NBP policy announcement.
The headline figure of the US December Manufacturing ISM missed expectations, declining from 61.1 to 58.7. However the underlying picture looked quite constructive. The setback was mainly driven by a decline in supplier deliveries (64.9 from 72.2) and in the prices paid index (68.2 from 82.4). These developments might be an indication that supply bottlenecks are becoming less of an obstacle for growth. At the same time sub-indices related to demand and activity held up well. The employment sub-index even rose further to 54.2 from 53.3.
