Markets
December EMU inflation numbers and US payrolls featured on today’s agenda. European inflation accelerated by 0.4% M/M and from 4.9% Y/Y to 5% Y/Y. It’s the highest yearly reading since the creation of the EMU. Core inflation was unchanged at 2.6% Y/Y. The 5%-reading beat consensus, but didn’t really surprise following higher-than-expected inflation numbers in several European countries earlier this week. Details showed energy prices remain responsible for the lion share of the move (26% Y/Y), but services (2.4% Y/Y) and non-energy industrial goods (2.9%) prices rise more than 2% as well. Markets didn’t respond to the European inflation release and steadied into the US job market report. The outcome was a mixed bag. The headline figure printed at +199k, significantly below 450k consensus. Even when taking into account the +141k upward revision to the previous two month’s data, we’re talking about a 110k miss. The Covid-experience did teach us that wild (statistical) swings turned more rule than exception of late. Average hourly earnings rose more than forecast – 0.6% M/M and 4.7% Y/Y – in a sign of building wage pressure. The unemployment rate declined from 4.2% to 3.9% in a sign of stronger underlying job growth in the household survey. The outcome is the lowest since February 2020 and adds credibility to the Fed’s intention to speed up the normalization process (rate hike in March, together with end to net asset purchases; balance sheet run-off later this year). The drop in the unemployment rate came at an unchanged participation rate (61.9%). Unlike the stoic reaction to EMU inflation, (bond) markets judged the payrolls report as sufficient to keep the Fed on track with its accelerated normalization plans. US Treasuries drifted south, underperforming German Bunds. US yields currently rise by up to 3 bps, but intraday moves have been larger. The US 10-yr yield for example bumped into 1.77% resistance (2021 high), causing some return action. It looks unlikely that this key level will crack ahead of the weekend. German yield changes range between + 1 bp and -1 bps across the curve. The US dollar again failed to profit from the rising yield differential and even trades in the defensive. The trade-weighted greenback slides from a 96.30 open towards the 96 big figure. EUR/USD prefers the area north of the 1.13 big figure, but isn’t contemplating a throw at 1.1383 resistance. US stock markets opened slightly under water.
News Headlines
Polish CPI accelerated to a higher-than-expected 8.6% y/y (0.9% m/m) in December. Food prices printed at a strong 2.1% m/m, contributing the most to the November headline figure. However, KBC Economics calculations show core inflation rose as well to roughly 5.2% y/y. The sharp price increases suggest the National Bank of Poland’s tightening cycle is by no means over. After hiking 50 bps to 2.25% earlier this week, governor Glapinski hinted at a similar move in February but risks for a bigger step have just increased. The very short end of the Polish swap curve jumped more than 10 bps to be above 3%. The zloty strengthened to EUR/PLN 4.55, testing the October interim low. The move occurred hours after the release though.
The Canadian labour market again posted a strong performance in December. Net payrolls grew 54 700 while only a gain of 25 000 was expected. The rise was entirely due to full-time employment (+122.500) which was partially eroded by a decline of 67 700 in part-time jobs. Most jobs were added in the goods-producing sector (44 200 versus only 10.600 in services). The unemployment rate declined from 6.0% to 5.9%. Short-term developments in the Canadian labour market still might be affected by new containment measures due to the surge in Covid- cases. Even so, the data still support the case for an ‘early’ BOC rate hike. Markets currently discount a first rate hike for the early March meeting. The Canadian dollar gained modestly after the data. USD/CAD trades near 1.27.
