Markets
In a first reaction, markets doubted how to react to US CPI release. US Headline consumer prices rose 0.5% M/M and 6.4% Y/Y (from 0.1%MM and 6.5% Y/Y). Core inflation printed at 0.4% M/M and 5.6% Y/Y (from 5.7%). Monthly moves were close to, but higher than, expectations. The report suggests that the disinflationary process might develop slower than the Fed and part of the market hoped for, reinforcing the ‘higher for longer case’. After some nervous swings immediately after the release, US yield ended the session higher with a further curve inversion. The 2-y yield gained 9.8 bps; the 30-y 0.2 bps. The 2-y-10-y spread reached a new cycle ‘peak’ of -87 bps. Markets now see a 50% chance of a third 25 bps additional Fed hike in early summer (after two other steps in March and May). Bets for a Fed rate cut in Q4 are scaled back. At least some Fed governors (Barkin, Williams, Logan) indicated that the Fed might raise rates further than initially anticipated if inflation stays too high. The US repositioning also spilled over to Europe with German yields gaining between 8.2 bps (5-y) and 5.6 bps (30-y). Worth mentioning, UK yields jumped an impressive 19 bps (2-y) to 7.6 bps (30-y) as market concluded that a strong job growth and higher than expected wage rises won’t allow the BoE to end its tightening cycle anytime soon. The impact from higher yields on equities remain modest. (EuroStoxx -0.06%, Dow -0.46%, Nasdaq +0.57%). The mild reaction of risk assets and yields also trending higher outside the US, limited USD gains. DXY closed the day little changed at 103.23. USD/JPY outperformed other USD cross rates as the yen corrected further after the nomination of Ueda as new BOJ governor (close 133.16). After some volatile intraday swings, EUR/USD closed marginally higher at 1.0738.
Asian markets are starting the session in risk-off modus with losses mostly between 0.5% and 1.75%. The dollar gains (EUR/USD 1.071; USD/JPY 133.25). (US) yields maintain yesterday’s post-CPI gains. The focus for global trading remains on the US with January retail sales (expected to rise 2% after -1.1% decline), the Empire manufacturing survey (expected -18.0 from -32.9), production data and the NAHB housing index. After yesterday’s CPI, data showing economic resilience might reinforce the view that the Fed will have to take further decisive action to slow demand. Also keep an eye at a $15bn 20-y US Treasury auction. The US 2-y yield (4.61%) nears the November cycle peak (4.799%). 2-year German and 2-y EMU swap yields are already setting new cycle peak levels. For now, the impact of higher yields on equites stayed modest. Even so, we still slightly favour the dollar over the euro. A break below EUR/USD 1.0656 would open the way to the 1.0484/61 area. This morning, UK January CPI data came out slightly softer than expected (headline -0.6% M/M and 10.1% Y/Y from 10.5%; core 5.8% Y/Y from 6.3%). Sterling in a first reaction returns most of yesterday’s gain with EUR/GBP jumping from the 0.882 area to the 0.8845 area.
News Headlines
UK PM Sunak and finance minister Hunt are considering to give workers at the National Health Service an additional lump sum pay by backdating next fiscal year’s pay rise (taking effect from April) to January 2023. The fear is that the room for wage increases within the existing health and education department’s budget is too little. Some estimate it at only 3% compared to an average inflation expected by the UK fiscal watchdog of 5.5% in 2023-2024. Such another year of a pay cut in real terms could infuriate unions and intensify the current biggest wave of strike in decades. But at the same time, the finance minister is keen on keeping pay under control, saying that it risks stoking and embedding high inflation in the economy.
French finance minister Le Maire will meet the country’s retailers to discuss price caps for essential goods amid surging inflation that’s eroding households’ purchasing power. France is already coping with large street protests over the president Macron’s plan to raise the retirement age from 62 to 64. The government seeks to avoid adding to people’s discontent and trigger cost-of-living strikes similar to those in the UK. Le Maire said he gives himself until March 15 to come up with a solution.
