Markets
Powell appeared before the Senate yesterday. In his renomination confirmation hearing, the Fed chair doubled down on the central bank’s policy normalization intentions. He said the economy no longer needs or wants a very supportive stance. Tackling inflation becomes instead a priority to ensure the economic expansion. This means rate hikes as well as the run-off of the balance sheet are – and we quote – likely later this year. Atlanta Fed governor Bostic earlier in the day voiced similar yet more concrete views, saying the central bank should consider a rate hike in March and start reducing the balance sheet “fairly soon” thereafter. Cleveland’s Mester and Kansas City’s George on Tuesday also preferred quantitative tightening sooner rather than later and at a quicker clip than in previous cycles. They all join several other colleagues, including Barkin and Bullard, suggesting the same in earlier speeches. Risks for the Fed reducing stimulus have become one-sided and are clearly growing.
Despite all that, US stocks had a good run. The Nasdaq (+1.41%) outperformed, clawing back above 15k. US bonds strengthened with yields declining 1.1 bp (2y) to 2.7 bps (30y) as real yields took a breather from their weeks-long surge. The long end outperformed even as the $52bn 3-year auction was a success. German bonds traded choppy. The wings of the yield curve outperformed with changes from 0.1-0.9 bps compared to a 1.3-1.9 bps increase at the belly. Declining US real yields lifted EUR/USD from 1.1326 to 1.1367. On a trade-weighted basis, DXY hit recent lows at 95.62. The positive equity sentiment kept USD/JPY in check (115.3). EUR/GBP closed at 0.8337, a new cycle low. GBP/USD retaking the 1.36 area supported that move.
Asia performs well this morning, banking on WS’s performance yesterday. Lower-than-expected Chinese inflation (1.3% vs 1.5%, from 2.3%) sparks hopes for more policy support, giving sentiment an additional boost. Core bonds inch higher this morning. The dollar loses out against most peers. EUR/USD is nearing a minor resistance zone around 1.138.
US December CPI is expected at 7% y/y at least, up from 6.8% in November. Core inflation could hit 5.4%. Risks remain tilted to the upside. Judging yesterday’s market reaction after several Fed speeches, including Powell’s, and after a failed technical break in eg. in the US 10y yield (beyond 1.77%) we nonetheless think core bond yield’s momentum could ease further in a daily perspective. Longer-term, the uptrend remains firmly in place though. The USD is slacking as well in recent days. We’re closely monitoring whether EUR/USD is able to extend gains beyond 1.138. That would bring 1.1422 on the radar. EUR/GBP’s downside looks vulnerable with the pair unable to stage a material comeback so far. We view 0.8277 as an important support.
News headlines
Polish PM Morawiecki announced a second anti-inflation package in as many months. The government will scrap VAT on staple foods, fertilizers and natural gas from February through July and reduce VAT on gasoline, electricity and heating. The PM called on retailers to reduce prices and asked Poles to watch out for shops that don’t. The proposed measures will add PLN 20bn to this year’s budget which was approved at around PLN 30bn in December last year. The Polish zloty remains near the strongest levels since September at EUR/PLN 4.54.
Chinese producer and consumer prices inflation both eased more than expected in December. PPI came down to 10.3% Y/Y from 12.9% Y/Y in November. The government’s efforts to cap commodity price surges probably plays an important role. CPI slowed from 2.3% Y/Y to 1.5% Y/Y with both food (-1.2% Y/Y) and non-food prices (2.1% Y/Y) moderating. Services inflation stayed around 1.5% Y/Y. The data give the Chinese central bank more comfort as it gradually eases monetary policy. USD/CNY currently trades near 6.36, below yesterday’s levels, but that’s mainly due to a generally softer dollar.
