Markets
Yesterday’s interview of Fed Chair Powell at the Economic Club of Washington for sure wasn’t the game changer some had hoped for. He agreed that further rate hikes are likely (maybe even more than envisaged in the December dots), but the level and the timing of the Fed peak policy rate remains conditional to the data. US payrolls and ISM last Friday pointed to upside risks, but after recent repositioning, markets remain cautious to really prepare for a new hawkish Fed-tilt. US yield are taking a breather with changes less than 2 bps across the curve. According to the Manheim Used vehicle index, average price of US used cars rebounded 2.5% in January, potentially slowing the disinflationary dynamics. However, this (admittedly partial) evidence doesn’t move US yields. European yields also didn’t get any clear directional guidance. German yields are gaining between 1.0 bp (2-y) and 2.5 bps (10-y). The German 10-y yield is returning the upper part of the 2.0%/2.50% consolidation range that is guiding trading since the start of the year. Tomorrow’s delayed German CPI data are a next reference for European yields, even as technical issues might complicate the analysis. US and European equity indices show good resilience despite the hawkish repositioning on core interest rate markets since Friday. The peak policy rate is one factor potentially hurting risk assets. However, for equity investors it’s probably at least as important how long central banks will keep interest rates in restrictive territory. In this respect, markets still are fighting CB guidance on higher for longer. Whatever the reason, the EuroStoxx 50 gains 0.4%, and is still only about 3.0 % away from the cycle top reached end 2021. After yesterday’s somewhat remarkable post-Powell rebound, US indices open little changed. Later, plenty of Fed and ECB policymakers are still scheduled to speak. The US Treasury later today will sell $35 bln of 10-y Notes.
The pause in (US) yield markets and a still rather mild risk climate also blocked further USD gains. The DXY index eases to 103.3 (from 103.42). EUR/USD today held an extremely tight sideways pattern near the 1.0750 pivot. The yen maintains yesterday’s gain, with USD/JPY struggle not to fall below the 131 big figure. In a low volatility environment, sterling outperforms with EUR/GBP drifting back below the 0.89 handle (0.8885). The decline in the Norwegian krone (EUR/NOK 11.03) and the Swedish krone (EUR/SEK 11.36) also took a pause, but is too early to already call a bottom. The Riksbank will announce its policy decision tomorrow morning.
News & Views
The White House Council of Economic Advisors (CEA) created a new wage measure for core non-housing services (NHS). It’s part of core inflation (together with core goods and housing services) often referred to as “supercore”. NHS are more labor intensive than the other categories with the tight labour market expected to play a meaningful role in this part of inflation. In the post-pandemic expansion, NHS average hourly earnings grew very quickly, reaching a 7% and 8% annual rate in early 2022 for all private sector and PNS (production, non-supervisory) workers, respectively. Since then, however, these series have both eased substantially and both were rising at a yearly rate of between 4.5–5% in December. In other inflation news, the Manheim used car vehicle index unexpectedly rose by 2.5% M/M yesterday (fastest pace since Nov2021), suggesting upside risks to next week’s US core CPI reading.
The ECB published the results of Supervisory Review and Evaluation Process (SREP) for 2022. On average, banks maintained solid capital and liquidity positions, with the vast majority holding more capital than the levels dictated by capital requirements and guidance stemming from the previous SREP cycle. For the year ahead, the weighted average of Pillar 2 requirements (P2R) set by the ECB for total capital remained in line with the requirements set out in previous years, at 2% of risk-weighted assets (RWA) after 1.9% in 2022. The P2R for Common Equity Tier 1 also remained broadly unchanged for 2023, at 1.1%. The average amount of overall capital requirements and guidance in CET1 increased to around 10.7% of RWA for 2023, up from 10.4% in 2022. At the end of Q3 2022, the average amount of CET1 held by significant institutions totaled 14.7% of RWA.
