Markets
The BoJ’s status quo set the tone for core bond yields right from the start of the trading day. ECB’s Villeroy dismissing rumours about a possible slowdown in the tightening pace from March was brushed aside while US economic data (disappointing retail sales, easing PPI) a bit later only reinforced the current market trend. US yields tanked 12.2 bps to 19.2 bps with the belly of the curve outperforming. Germany’s yield curve inversion deepened by 10 bps+ at the longest tenor. European shares forfeited earlier gains, Wall Street ended with losses of 1.24-1.81% as recessionary fears loom while yesterday’s central bank talk by Bullard & Mester suggested that the Fed isn’t backing off anytime soon despite weakening (hard) economic data. The sharp (US) yield drop initially pushed the dollar further in the defensive. EUR/USD hit an intraday high just below 1.09. But the greenback gradually recovered on safe haven flows as (equity) sentiment deteriorated. USD/JPY experienced a lot of volatility. Post-BoJ yen weakness was followed by a fainting dollar only to recover a bit again. The pair ended the rollercoaster ride higher at 128.90 (compared to an intraday high/low of 131.58/127.57). The British currency bucked the risk-off by appreciating to EUR/GBP to 0.874 following (higher-than-expected core) CPI that keeps pressure on the Bank of England high.
Recession fears spill over into the Asian session this morning. Stocks trade mixed with Japan underperforming (-1.4%). A setback in Australia’s labour market (see below) served as an additional mood killer. Yields in the region tank >20 bps. Rates in other markets, including the US and Japan, also extend the move lower. Dallas Fed Logan and Philly Fed Harker struck a less hawkish note in overnight interviews. Both voting members favour to downsize to 25 bps at the next meeting though the latter reiterated the need of getting above 5%. The yen outperforms this morning. USD/JPY eases to 127.81. The Australian dollar is on the other side of the spectrum, dropping to the low AUD/UD 0.69 area (from 0.6943). The US dollar trades mixed with EUR/USD eking out a slight gain to 1.08.
Today’s economic calendar contains US housing data and weekly jobless claims but they won’t be able to turn the current market tide. If anything, a sub-consensus reading would only reinforce it. US 10y yield technicals have deteriorated after losing support at 3.40/42%. The next reference is located between 3.20/3.25% (May interim high/38.2% retracement on the 2022 yield rally). Germany’s 10y yield avoided a close sub 2% yesterday. But if hawkish ECB meeting minutes fail to convince (European) markets, we fear it is postponing the inevitable. The 23.6% 2022 retracement/June high (1.923/7%) is next on the charts. EUR/USD’s intraday pattern suggests it won’t be easy for the pair to push through the recent highs in case of risk aversion driven by recessionary fears. The dollar’s downside looks a bit better protected. Several ECB and Fed speeches serve as a wildcard.
News Headlines
The Australian December labour market report disappointed. Employment fell by 14.6k, though details showed a divergence between a 17.6k increase in full-time jobs and a 32.2k loss of part time occupations. The seasonally adjusted unemployment rate remained at 3.5%, in line with the updated figure for November though this happened against the background of a lower participation rate (66.6% from 66.8%). Despite this setback, it is still 0.8 ppt above the pre-pandemic level. The fall in employment and hours worked (-0.5% M/M) in December followed strong growth through 2022, with an annual employment growth rate of 3.4% and hours worked increasing by 3.2%. Overall, the Australian labour market remains tight. Separately, the Melbourne Institute of Applied Economic and Social Research released its January consumer survey. Consumers expect prices will rise 5.6% over the next 12 months, up from 5.2% in December and compared with 4.4% in the January 2022 survey. The Aussie dollar cedes more ground this morning, returning to AUD/USD 0.69 after yesterday failing to take out the 0.70 big figure. Australian money markets are split over whether or not the RBA will deliver another 25 bps rate hike at its February policy meeting.
The Royal Institution of Chartered Surveyors (RICS) released its December UK Housing Market Survey. The headline figure dropped to -42% (proportion of surveyors reporting a rise in prices minus those reporting a fall), the lowest level since October 2010. Details were weak all over with price & sales expectations, new buyer enquiries, new instructions and agreed sales all showing deeper declines. The sales to stock ratio fell from 39.1% to 38.8% with both stock and sales falling.
