Markets
The (mainly) European bond and equity rally from the first three trading sessions of the year today met a roadblock. Italy was the last of the major EMU member states to publish preliminary December inflation data. With HICP inflation at 0.2% M/M and 12.3 Y/Y (from 12.6%) the country parted ways from the unexpected, substantial easing of headline inflation in almost all other EMU members states. Admittedly, this for sure wasn’t the main reason for the bond rally to halt. While European markets were some kind of a trendsetter earlier this week, the focus is gradually returning back to the US. The ADP report on private job growth still surprised on the upside (235k additional employment vs 182k last month and about 150k expected), confirming the Fed’s assessment that a tight labour market and upside wage drift might prevent underlying inflation to continue a sustained trajectory to the 2% target anytime soon. In the same vein, jobless claims (weekly and continuing) also printed lower than expected. US yields already were already a few basis points higher pre-ADP and this trend accelerated after the data. The US curve inversion deepened with yields rising 13 bps for the 2-y to 6 bps for the 30-y. Global sentiment also blocked this week’s strong EMU/German bond rally, with Bund yields adding 8 (2-y) to 5.5 bps (30-y). Intra-EMU spreads widened marginally later in the session, but the move remains modest (10-y Italian spread versus Germany +2 bps). In the meantime, European sovereigns continue their first major tranche of 2023 funding. After Austria (€ 5bln, 10-y) and Slovenia (€ 1.25 bln 10-y) yesterday, Ireland today priced a € 3.5 bln 20-y green bond. Portugal sells € 3 bln of 15-y bonds, both with strong order books. On other markets, the rise in yields also blocked the equity rally from earlier this week. Losses in Europe stay modest (EuroStoxx50 -0.4%). The US again underperforms (S&P 500 -1.2%). In the energy complex the decline in the Dutch reference gas contract halted (TTF Feb future € 67 p/MWh). Oil on the other hand stays in the defensive with Brent ($ 78.25 p/b) holding near recent correction low.
The post-ADP jump in US yields this time almost immediately translated into a stronger dollar. The trade-weighted DXY jumped from the 104.20 area before the data to touch an intra-day top just below 105. EUR/USD leaves the 1.06+ area. At 1.055, first ST support at 1.052 is again withing reach. Similar story for USD/JPY. The era of post-BOJ yen strength is over, with USD/JPY trading at 133.60 compared to a correction low at 129.52 earlier this week. Sterling underperforms both the dollar and the euro with EUR/GBP (0.885) again nearing the key 0.8870 resistance area. According to the BoE’ monthly survey, UK business leaders raised year-ahead expectations for CPI inflation further to 7.4 from 7.2%. Wage expectations rose 0.5% to 6.3%. News Headlines
Saudi Arabia cut oil prices for Asia for all types of crude to be shipped in February. It’s a sign that demand in the country’s main market remains sluggish amid slowing economies and a surge in corona cases in China. State-controlled oil producer Saudi Aramco lowered the price to $1.80 a barrel above the regional benchmark (Dubai crude). That’s $1.45 lower than the price for deliveries this month. Oil prices on broader international markets have been declining dramatically over the past few months. The European Brent reference slid by a third from above $120/b in June to below $80 today despite OPEC’s decision to cut production by 2 million barrels a day in October. Its next regular meeting is scheduled for June.
Polish inflation eased more than expected. Prices rose 0.2% m/m instead of the 0.7% anticipated, bringing the yearly figure down from 17.5% to a still-elevated 16.6% (17.4% expected). It’s the second decline straight, feeding hopes that headline inflation may have peaked in October at 17.9%. The National Bank of Poland, which kept policy rates steady at 6.75% yesterday and is giving a press conference later today, had penciled in an average 17.9% for 2022 Q4 with the peak seen in 2023Q1 at 19.6%. The decline was driven by falling electricity, gas and fuel prices (-3.3% m/m). Food prices still rose by 1.4% m/m. Despite the drop in headline inflation, caution is warranted since core inflation (ex. energy and food) so far hasn’t shown any signs of topping out. The December reading is due January 16. Poland’s currency shrugged. EUR/PLN ekes out a slight gain from 4.667 to 4.675.
