Markets
The Bank of Japan stuck to its ultra-easy monetary policy this morning, pushing back against heavy market speculation that the central bank would take or at least announce further steps towards policy normalization. Japanese yields fell off a cliff, particularly in the BoJ-capped 10y maturity. This immediately spilled over into core bond markets. Yesterday’s Bloomberg report citing sources that ECB policymakers are contemplating slowing down the tightening pace from March – contrasting with official December guidance – lingered still as well. Markets brushed aside ECB governor Villeroy’s early morning intervention. He said that the December narrative (50 bps on the next couple of meetings) is still valid. European swap yields decline 3.5-12.2 bps with losses deepening after US numbers were released. Hard economic data in the US now seem to follow the roll-over in sentiment indicators (eg. yesterday’s Empire manufacturing). Retail sales in December undershot expectations across the board (headline: -1.1%, a private consumption proxy: -0.7%) and came on top of a downward revision to the November figures. Ten out of the 13 categories printed declines last month with sales value at gasoline stations slumping 4.6%. PPI inflation eased further to 6.2% (headline) and 4.6% (ex food, energy and trade) in December, fueling the UST rally. US yields shed 9.9-14.9 bps with the belly of the curve outperforming. Markets aren’t so much lowering the expected (yet still-too low) terminal rate (4.75-5%) but they do increasingly discount rate cuts further out. US equities eke out a small advance with the prospect of a recession offset against lower core bond/US yields. The EuroStoxx50 rose to the highest level since February last year. The index is now just 5% below its post-pandemic high seen in November 2021.
EUR/USD on the foreign exchange market revisited the Villeroy-driven intraday highs after the US data release caused renewed dollar weakness. The pair is testing recent highs around 1.0867. A breach looks ever more plausible. The trade-weighted DXY approaches next support at 101.297 (May 2022 correction low). The USD is barely a match for the Japanese yen. USD/JPY stabilizes near 128.11. This compares to an intraday high of 131.58 seen immediately after the BoJ announced the status quo. The British pound holds up well. After a solid labour report, December CPI this morning showed that price pressures are still extremely strong (10.5%) with the underlying gauge even topping estimates (6.3%). The numbers keep the Bank of England on a tightening path, despite some in the MPC having second thoughts because of slowing growth. EUR/GBP dips to 0.875 and is closing in on first support at 0.8721. GBP/USD (1.243) is nearing the 6-month high seen last December around critical resistance of 1.2451.
News Headlines
December headline inflation in South Africa printed at 0.4% M/M and 7.2% Y/Y, compared to 7.4% in November. Core CPI was reported at 5.1%, unchanged from November. Higher food prices (12.4%) still were an important factor of higher global prices. This put average inflation for 2022 at 6.9%, the highest level since 2009. The Reserve Bank of South Africa has a target range of 3-6%. The SARB raised its policy rate from 3.50% end 2021 to 7.0% (last step of 75 bps in November). The first policy meeting for this year is January 26, with new economic forecasts available. A limited further hike might be on the cards. A separate report today showed stronger than expected November retail sales at 0.4% M/M and 1.1% Y/Y. The rand is already on gradual appreciation trend against the dollar since end October but this mostly mirrors USD weakness. The rand gains slightly with USD/ZAR trading just below 17.
According the January oil market report released by the International Energy Agency global oil markets might see a bigger than expected surplus in the first half of 2023. According to the agency, ‘a slow demand recovery expected in 1H23 suggests continued inventory builds like those that started to emerge in 3Q22’ According to IEA, supply outpaced demand by over 1 mb/d in Q4 of last year. However, the agency indicates that the well-supplied balance at the start of 2023 could quickly tighten as sanctions will impact Russian exports and China consumption might accelerate. Bent oil today rebounds further rising to $87.3 p/b.
