Markets
US markets reopened after the long weekend (Martin Luther King Day), but didn’t provide any new directional narratives for global trading. Core US and European yields this morning tried to build on a tentative bottoming out process. Still, the feeling was/is that any sustained rise in yields remains difficult for now. Early in US dealings, the US Empire manufacturing survey tumbled sharply from -11.2 to -32.9, the lowest level since May 2022 and confirming recent evidence on a slowdown in the sector. The report blocked the upward momentum in yields. In a steepening trend, the US 2y yield is ceding 2 bps. Yields at longer maturities still trade modestly positive (30y; +3bps), but off the intraday peak. Regarding US data later this week, retail sales (release tomorrow) take center stage. A soft figure from the spending side of the economy, if it were to materialize (-0.9% M/M is expected for headline sales), might revive recent dovish markets dynamics like after softer inflation data. After trading in green earlier, German yields are also easing 1/2 bps across the curve, with Bunds slightly underperforming swaps. 10y intra-EMU spreads vs Germany over the previous days also showed tentative signs of bottoming (Greece today + 9 bps, Italy +2 bps). Greece today launched a €3.5 bn 10-y bond at MS +165 bps. The February TTF Dutch y gas contract this morning touched a new correction low near €51.4/Mwh, but rebounded intraday (currently €58). Oil extends its gradual uptrend (brent $85.5/b). Equities show lackluster dynamics, at best. European indices are little changed (EuroStoxx 50 +0.2%) even as German ZEW investor confidence improved sharply with the expectations component jumping from -23.3 to 16.9. US indices open with a modest loss (0.25%) as earning from the US banking majors (Goldman, Morgan Stanley) failed to convince investors.
Sterling gained modestly on FX markets as the short-term interest rate differentials with the US and EMU rose after decent UK labour data this morning, with a faster-than-expected rise in wages (6.4% Y/Y) catching eye. EUR/GBP dropped from the 0.8890/70 resistance area to touch an intraday low near 0.8835. However, further gains were blocked (currently 0.885), probably as investors await the UK December inflation data tomorrow. The dollar initially traded sideways, but again lost momentum after the very poor Empire manufacturing release. The DXY index struggles not to return below the 102 handle. EUR/USD (1.086) nears recent peak levels around 1.087. USD/JPY trades little changed near 128.5. In this cross rate, the focus now turns to the yen-side of the story with investors looking out for more tweaks in policy as the BOJ concludes its policy meeting tomorrow morning.
News Headlines
OPEC’s top official, Secretary-General Al-Ghais, turned cautiously optimistic on the outlook for the global economy. In an interview with Bloomberg in Davos he said that a potential slowdown in advanced economies is still the biggest concern but that it is being countered by accelerating growth in Asia. He referred to China’s reopening, which also helps oil demand to recover. To avoid a glut, OPEC cut back production significantly last year. But Al-Ghais said it was premature to say if this needs to be reversed already, even as potential supply losses from sanctions-hit Russia loom. The oil cartel holds a monitoring meeting on February 1. Oil prices inch higher today with the Brent reference adding 1.5% to $85.75/b currently.
Canadian headline inflation eased a bit more than expected in December. Price growth decelerated from 6.8% to 6.3% (-0.6% m/m) vs 6.4% expected. Underlying inflation also eased but only because the November reading was revised upwards. At 5 or 5.3% (depending on the gauge), it remains well above the Bank of Canada’s 2% target. The BoC lifted policy rates by 50 bps to 4.25% at the most recent meeting in December. Further increases were not a given with inflation still too high and tight labour markets on the one hand but moderating consumption and declining housing activity on the other. Next week’s policy meeting comes with updated forecasts and could set the stage for a pause in the cycle after delivering a final 25 bps rate hike. Such a scenario is not yet fully discounted by markets (+/- 75%). Canadian swap yields erased previous losses after the CPI release to trade 3 bps+ higher. The Canadian dollar barely budges. USD/CAD is testing the 1.34 big figure.
