New Vigor on Bond Market Curtailed Dollar’s Momentum

Markets

The US eco calendar provided first meaningful input for 2024 trading yesterday. Data strengthened the goldilocks scenario of growth stabilizing at a low, but no recessionary, level in combination with a labour market turning less tight and an ongoing disinflationary process. The manufacturing ISM recovered marginally more than expected (47.4 from 46.7), but remains mired in recessionary territory (<50) for the 14^th consecutive month. Details showed a mixed picture with production and export orders stabilizing and the pace of job cutting slowing. (Domestic) new orders fell at a more rapid pace though. Cheaper commodities (mainly oil prices) pulled the prices paid gauge in the ISM-report to a six-month low of 45.2. JOLTS job openings fell from 8.85mn to 8.79mn (from a 12.03mn peak in March 2022), the lowest level since early 2021 though still significantly above the pre-pandemic peak (7.59mn). The quits rate ticked down to 2.2% from 2.3%, the lowest since September 2020, suggesting less confidence to switch jobs. After some hesitation, the early (US) date releases provided new momentum for US Treasuries. The release of FOMC Minutes of the December policy meeting provided a final boost. There was no meaningful debate whatsoever on the timing of a first policy rate cut – high “for some time” – but they unexpectedly featured a paragraph on the balance sheet run-off. Several participants suggested it would be appropriate to begin discussing the technical factors that would determine when the US central bank slows its quantitative tightening process. The Fed started QT in June 2022 and currently allows $60bn of Treasuries and $35bn of mortgage-backed securities to mature each month without reinvesting the proceeds. Slowing and stopping QT should happen when bank reserves (currently $3.48tn) are “somewhat above the level judged consistent with ample reserves”. Minutes didn’t give any indication on what the equilibrium reserve level should be. During the previous QT campaign (2017-2019), reserves fell from around $2.4tn to $1.5tn.

Daily changes on the US yield curve yesterday ranged between -1.3 bps and +0.9 bps with the belly of the curve outperforming the wings. German yields dropped by 3.4 bps (30-yr) to 4.9 bps (5-yr). New vigor on the bond market curtailed the dollar’s momentum with the trade-weighted greenback halting its ascent near first resistance around 102.50. EUR/USD closed at 1.0922 from a start at 1.0942. Stock markets failed to profit from the change of tide with key European indices losing up to 1.5% and US benchmarks sliding up to 1.2% (Nasdaq). EUR/GBP slid from 0.8671 to 0.8617 on an underperformance of UK gilts (yields rising by up to 5 bps at the front end of the curve). Today’s eco calendar contains US ADP employment change and weekly jobless claims. National EMU inflation data for December offer a first glimpse on what to expect from the aggregate figure tomorrow. The main question is how large the (upward) impact from statistical base effects will be and whether they’ll be able to install a topping out pattern on the November/December bond rally.

News & Views

The South Korean government turned slightly less positive in its economic policy plan published this morning. 2024 growth is seen at 2.2%, down from 2.4% in the previous (July) estimate. 2023 growth is expected at 1.3%. Despite a more modest rebound in activity, the government expects inflation to stay somewhat higher at 2.6%, upwardly revised from 2.3% in July. “The economic recovery will be stronger (than last year) amid improvements in global trade and demand for semiconductors, but there will be difficulties in domestic demand and people’s livelihoods due to persistently high inflation and interest rates,“ the government assessed. It intends to contribute to bring inflation back to 2% in the first half of this year, by tax and tariff cuts and a cap on utility prices. It also intends to advance/prolong tax incentives to support investment.