Markets
Developments in Asia raised hopes that (equity) markets could enter calmer waters after recent setback. Chinese banks passing through recent PBOC easing and hope for more to come to some extent might mitigate the impact of (accelerated) Fed normalization for the region. However, European indices initially hovered around unchanged levels and currently gain a meagre 0.25%. The oil price easing (Brent S87.9) after recent sharp rise should be a positive for the region, but weighed on regional indices (correction in energy shares).
Geopolitical risks probably also hampered regional sentiment as the EU Ministers meet with US Secretary of State Blinken ahead of his key meeting with Russian Minister Lavrov tomorrow. US equities outperform Europe rising up to 1.4% (Nasdaq).
Eco data were few. German December PPI inflation jumped an astonishing 5.0% M/M and 24.2 Y/Y.
The ECB published the accounts of the December meeting when it raised the 2022 inflation forecast and set out the roadmap for its policy post PEPP ending in March. Contrary to the Fed Minutes, the accounts didn’t show a similar lively debate on alternative paths policy normalization. (Some) ECB members cautioned that inflation staying higher for longer can’t be ruled out and that it can easily stay above 2% in 2023/24. Some members didn’t agree with the policy proposal as they made reservations on the recalibration of APP bond buying, the extension of reinvestments under a pandemic emergency scheme and the increased flexibility of bond buys beyond the pandemic. Even so, this wasn’t the trigger for a further rise in European yields.Â
Earlier today ECB’s Lagarde in an interview already indicated that the ECB is in a different position compared to the Fed. The German yield curve bull flattens with yields declining between 1.2 bps (2-y) and 2.8 bps (30-y) (rise in 5-yield was benchmark change). The 10-y yield (-0.035%) again trades well in negative territory). US Treasuries outperform with yields declining between 1.8 bps (2-y) and 4.25 bps (5 & 10-y).
US eco data were mixed with the Philly Fed outlook improving from 15.4 to 23.2. However, US jobless claims unexpectedly jumped from 231k to 286K as omicron disturbs activity in several parts of the country.
The correction on core interest rate markets and a more benign equity sentiment aren’t able to provide clear guidance for the dollar. The DXY index trades marginally weaker (95.5) compared to yesterday’s close. At the same time the euro also hardly profits (EUR/USD 1.1345). Sterling maintains recent strength after yesterday’s CPI data and anti-inflation comments from BoE governor Bailey. EUR/USD is changing hands in the 0.8330.News Headlines
The Turkish central bank as expected kept policy rates stable at 14% today. The CBRT in December cut rates a last time, saying it wanted to assess the impact of all monetary easing throughout the second half of 2021 first. Earlier this week, president Erdogan implicitly gave his blessing for a status quo. He said future rate cuts would come “gradually and without any rush”, which was seen as a shift vs. an aggressive push for lower rates before. This however does not change the fact that real (policy) rates with an inflation of 36% (December) remain extremely negative and are a drag for the Turkish lira, especially in an environment of rising core bond yields. For today though, the Turkish currency marginally strengthens vs the euro to EUR/TRY 15.16.
The Norges Bank stuck to a policy rate of 0.50% but reiterated it expects to continue its hiking cycle in March, citing the ongoing economic swing. Containment measures due to recently higher infection rates have held back activity but that should reverse soon and quickly when they are being relaxed again. Unemployment edged up slightly in December yet is probably still lower than projected in the NB’s latest projections. Underlying inflation on the other hand has accelerated more than expected and is close to the 2% target (1.8% in December). The NB Committee added it was concerned with the risk of a “potential rise domestic price and wage inflation due to capacity constraints and persistent global price pressures”. Gains for the Norwegian krone are minimal with a March rate hike being flagged for quite some time now. EUR/NOK eases slightly to EUR/NOK 9.94.
