Markets
Wall Street tried to shrug off a rough month by printing impressive back-to-back gains. The Nasdaq outperformed, eking out another 3%+ gain. January is still the worst month for the tech-heavy index since March 2020 though. US yields rose with the belly outperforming the wings. The short end added 1.5 bps even as some Fed governors including Daly leaned against current market expectations of five rate hikes. Fed’s Esther George in an interview preferred “more aggressive action on the balance sheet [that] could allow for a shallower path for the policy rate”. She warns that doing the opposite could flatten the yield curve and distort credit incentives. Other changes vary from 1.5 bps (2y) over flat (7y) to 3.4 bps (30y). German/European yields surged. European GDP growth was largely in line with expectations (0.3% q/q) but German HICP eased much less than markets (and the ECB) hoped it would. Inflation fell from 5.7% y/y to 5.1% y/y with very strong monthly dynamics (0.9% m/m). It poses risks for the European figure to be released tomorrow and ahead of the ECB on Thursday. Germany’s curve bear flattened with yields 7.9 to 8.5 bps higher for the 2y and 5y. The 10y yield (+5.6 bps) closed in positive territory for the first time since 2019. EUR/USD profited from the rising interest rate differential as well as the upbeat risk climate. The pair rebounded from the 1.1163 support area to back north of 1.12, helped by dollar weakness too (DXY eased from 96.54 from 97.24). The same applied for EUR/GBP: bouncing off recent lows around 0.83 to 0.835.
The RBA grabs most attention during Asian-Pacific dealings today (see headline below). The Australian dollar is little affected by the decision. Most other major currencies trade muted too. CHF tops the board. Core bonds have a slight upward bias. Most stock markets show small gains. China remains closed for the week.Today’s economic calendar gets moderately interesting with US ISM business confidence for the manufacturing sector. Consensus expects an easing from 58.8 to 57.5. We keep a close eye at the delivery times component in particular to have a pulse on supply strains. The figure won’t affect the general trading patterns though. Germany’s 10y yield push into positive territory is symbolically and technically important. We look out for follow-up gains in the run-up to the ECB. EUR/USD has still some way to go before capturing first meaningful resistance, situated at around 1.13. A protracted rebound is only likely when the ECB finally takes the turn. British money markets are looking forward to the Bank of England on Thursday. A 25 bps rate hike is discounted. For the time being EUR/GBP 0.83 looks pretty solid.
News Headlines
The Reserve Bank of Australia kept its policy rate unchanged at 0.1%, but decided to cease further purchases under the bond purchase programme after February 10. Governor Lowe stressed that this does not imply a near-term increase in interest rates. The RBA sticks with its guidance to wait until actual inflation is sustainably within the 2%-3% target range. The RBA sees underlying inflation increasing further in coming quarters to around 3.25%, before declining to around 2.75% over 2023. Uncertainties remain about how persistent the pick-up in inflation will be as supply-side problems are resolved. Wage growth picked up but also remains modest even as the unemployment rate already fell to 4.2% in December. The central bank puts it at 3.75% at the end of 2023. The Omicron outbreak didn’t derail the economic recovery with the RBA forecast GDP growth of around 4.25% over 2022 and 2% over 2023. The Aussie dollar holds near AUD/USD 0.7050. Money markets remain convinced that the RBA will pull the trigger on interest rates in coming months (June) even if Lowe pushes back against early tightening expectations.
Germany, the Netherlands, France, Belgium and Italy expressed some worries over the Chips Act proposal from the European Commission. The EU wants to make 20% of the world’s chips by 2030. The 5 nations want to avoid a subsidy race resulting in an overproduction of chips, and rather suggest state aid to go to innovation more than cutting-edge production plants. They agree that the EU needs to keep their markets open to and open for other continents instead of focusing on reshoring only.
