Weak JPY Following Disappointing (But Outdated) November Labor Earnings Data

Markets

Bond supply stood in the center of attention yesterday. Belgium and Italy kicked off in Europe. Both received bumper investor interest, the former for a new 10-year OLO benchmark and the latter for a 7-year one as well as a tap of an existing 30-year BTP. The US started its monthly refinancing round with a $52bn 3-year auction stopping through the WI. With markets absorbing the load well, the impact on yields stayed modest. German Bunds underperformed Treasuries. Yields increased between 5 and 6.2 bps. This was, however, mainly a catch-up move with a late-session UST swoon on Monday. After yields gapped higher at yesterday’s open, they traded sideways. ECB’s Villeroy after European closing hours weighed in on the heated rate cut debate. But the nor-dove-nor-hawk was, well, neither dovish nor hawkish. While saying that 2024 would see the first rate cuts, he declined on giving a timing. The Frenchman said the ECB shouldn’t rush things but must not be too obstinate about it either. US yields eased a few bps (0.8-2.2), the belly outperforming the wings. The dollar held the upper hand in currency markets, supported in part by the fragile risk environment (equity markets closed up to 0.4% lower in Europe and the US). EUR/USD moved south to 1.093 in technically insignificant trading. USD/JPY bounced off the 200dMA to end at 144.48. The pound caught a breather following the surge so far this week. EUR/GBP rose from an intraday low around 0.858 to just north of 0.86. Even as GBP continues in Asian dealings this morning, the currency’s early 2024 track record is strong nonetheless. Other moves in FX include a weak JPY following disappointing (but outdated) November labor earnings data. The BoJ’s window of opportunity to ditch negative policy rates is closing rapidly. USD/JPY is testing the 145 big figure and equities in the country (up to +2%) greatly outperform regional peers. The Aussie dollar appreciates even as inflation eased slightly more than expected from 4.9% to 4.3% in November. The eco calendar is once again razor thin today, meaning technically inspired trading ahead of tomorrow’s US CPI numbers. Supply does remain in focus, this time with Spain (20-y syndication) and the US auctioning $37bn of 10-y bonds. Considering yesterday’s bond sales, we expect no major issues for the ones today. NY Fed president Williams’ speech on the 2024 eco and inflation outlook is worth listening to but comes only in late US dealings.

News & Views

The National Bank of Poland kept its policy rate unchanged at 5.75%. The central bank’s rate cut cycle is now on hold for a third meeting running after a cumulative 100 bps stealth easing around the time of tide-changing parliamentary elections in October. Polish data suggest that growth increased in Q4 2023, yet it remained relatively low. The labour market is still tight and the unemployment rate low. Polish inflation is expected to fall significantly in coming months (6.1% Y/Y in December) but the decline in core inflation will be slower with sticky wage inflation playing a key role. The NBP is happy with the support an appreciating zloty is providing in helping inflation lower as it is consistent with fundamentals of the Polish economy. NBP governor Glapinski will give more comments on the outcome of yesterday’s meeting and the path forward at this afternoon’s press conference. We think that an another unchanged decision will follow in February with the early March meeting being the important one when new projections will be released. The Polish zloty holds strong in the EUR/PLN 4.35-area.

The Fed’s vice chair for supervision, Michael Barr, signaled that the central bank’s Term Funding Program (BTFP) is set to expire on March 11. The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging any collateral eligible for purchase by the Federal Reserve Banks in open market operations. The BTFP was set up for emergency purposes in the wake of the SVB collapse in March of last year with the aim of eliminating an institution’s need to quickly sell assets in times of stress. The BTFP was extensively used of late as institutions borrow at the one-year overnight index swap rate (which currently discounts rate cuts over the next 12 months) rather than at the 5.5% rate from the discount facility.