Markets
Markets took a slow start to the trading week yesterday as US investors were absent due to the Martin Luther King holiday. On other major developed markets, the news flow was thin. European equities drew some comfort from China easing policy. European indices closed with gains of about 0.50-%0.75%. The by default trend on European interest rate markets also remains north even without guidance from the other side of the Atlantic. German yields rose between 2.2 bps (2y) and 1.3 bps (30-y). The 10y German yields again came with reach of the 0.02% top/the psychological barrier of 0.0%. The dollar gained modestly with the DXY closing at 95.26 and EUR/USD at 1.1408.
This morning the Bank of Japan left its policy unchanged, but changed its assessment on inflation (cf infra). Still any speculation on a policy change is probably premature. Japanese yields are little changed. USD/JPY immediately after the decision jumped from the 114.50 area to the 115 area, suggesting that markets were positioned for a more hawkish guidance. Outside Japan, a sharp rise in US yields as trading resumes after the MLK holiday is catching the eye. Fed-governors are no longer allowed to give guidance on policy as they are in the blackout period ahead of next week’s policy meeting. It doesn’t prevent markets from anticipating bolder Fed action. The US 2-y yield jumps north of 1.0% (currently 1.05%), the highest since end February 2020. The 10-y yield surpasses the 1.80% cycle top (currently 1.84%). The rise in yields is causing some, albeit mostly modest losses on Asian equity markets. China is the exception to the rule (CSI 300 + 0.7%) as markets ponder chances for further PBOC stimulus. Even so, the yuan (USDNCY 6.3425) is holding strong after touching a new cycle top overnight.
Later today, German ZEW economic sentiment is expected to improve slightly from 29.9 to 32.0. In the US, the Empire Manufacturing is expected to ease from 31.9 to 25, but this is still a lofty level. We don’t expect today’s data to change the debate on policy normalization. Key question is whether US investors will join bond sell-off in Asia. Markets now discount four 25 bps hikes starting in March and some investors are debating chances of a 50 bps hike at the start. The broader trend might propel the German 10-y yield in positive territory. Other question is whether the dollar will profit from markets further frontloading policy normalization. At least this morning, USD gains are again modest even as equities indices point to losses at the European open. In the UK, labour market data this morning were close to expectations (3M November employment softer than expected at 60k; unemployment rate dropped to 4.2% and wages rising 4.2% as expected). In a first reaction EUR/GBP is holding in the 0.8355 area.
New Headlines
The Bank of Japan didn’t alter policy parameters that include bond buying, a -0.10% main rate and a 0% 10y yield target. It did, however, for the first time since 2014 change the balance of inflation risks from mainly to the downside to balanced, meaning the BoJ sees equal risks for prices to overshoot target. The move came after Reuters, citing sources, reported last week that the BoJ is debating how to start communicating on a possible rate hike, even if inflation remains sub-target. The latter is still the case in the updated forecasts, which, although lifted, show inflation well below 2% (1.1% in FY 2022 and 2023). Growth in FY21 (to April) was revised downwardly from 3.4% to 2.8% but is seen at 3.8% in FY2022 (from 2.9%) on Omicron delaying the recovery. The Japanese yen lost ground with some investors perhaps expecting more having the Reuters article in mind. USD/JPY trades at 114.82.
During yesterday’s Eurogroup meeting, a number of euro area finance ministers raised the issue of inflation (5% in December). They warned that it is affecting purchasing power and thus economic growth. The Eurogroup President Donohoe in a press conference later said high inflation will indeed last longer than initially expected but added he was convinced that price pressures will begin to moderate later in the year as supply chains continue to improve and effects from forced accumulation of savings due to the lockdowns start moderating. The Eurogroup also discussed corporate vulnerability and structural developments after the pandemic, the draft recommendation on economic policy for 2022 and the banking union.
