Dollar Shows Broad Gains

Markets

With US markets closed for Martin Luther King Day, Europe was obliged to find its own intraday dynamics. After a sharp US driven (softer PPI’s) yield decline on Friday, German rates gapped higher at the open (+/-4 bps). Initially, there was little news to support a clear directional move. A preliminary estimate of the German Statistical office of the country’s 2023 GDP growth was set at -0.3% Y/Y, in line with expectations. The estimates/details in the report didn’t provide much of a reason for yields to rally further. Later in the session, the focus turned the ECB members speaking on the sidelines of the World Economic Forum in Davos. Buba’s Nagel repeated his assessment that it’s too early to talk about rate cuts as inflation still remains too high. He labelled markets’ pricing as too optimistic. Later, ECB’s Holzmann, admittedly a well-known hawk within the ECB MPC, even indicated that one should not bank on rate cuts in 2024 as geopolitical tensions still risk disrupting supply chains and energy markets, potentially keeping price increases at levels the ECB can’t ignore. Hawkish comments from Nagel and Holzmann shouldn’t come as a big surprise. Even so, German yields gained some further traction close higher between 8.1 bps (2-y) and 4.0 bps (30-y). Higher yields added to a risk-off sentiment with the EuroStoxx 50 ceding 0.57%. Despite ongoing tensions on Middle East supply, Brent oil held stable below the $80 p/b mark (close $78.15). Higher EMU yields and at the same time a risk-off sentiment kept the euro and the dollar in balance (EUR/USD close 1.095). Sterling lost modest ground against the euro as UK yields rose less than EMU/German ones (EUR/GBP close 0.8603).

This morning, US yields are joining yesterday’s rebound in Europe and gain about 5-6 bps across the curve. Asian markets are captured by a broad risk-off sentiment often ceding 1% (+). India outperforms. The dollar shows broad gains (DXY 102.87, EUR/USD 1.092, USD/JPY 146.1). The eco calendar today is again rather thin. ECB inflation expectations and the ZEW economic confidence might influence intraday trends but are no game changers. ECB’s Villeroy will speak in Davos. The US calendar only contains the Empire manufacturing survey. Fed’s Waller will speak on the economy. Even as US yields are gaining a few bps this morning, last week’s price action keeps the downtrend in place, especially at the short end of the curve. The US 2-y yield needs to regain the 4.40% area to call off the downside alert. On FX markets, first USD resistance/euro support is coming in at 1.0877.

UK labour market data this morning came in on the soft side of expectations. The number of payrolled employees declined a bigger than expected 24k. At the same time average weekly earnings growth (ex-bonus) slowed more than expected from 7.2% to 6.6%. In a first reaction, sterling is losing some further ground (EUR/GBP 0.8615).

News & Views

Former BoJ executive director as well as ex-chief economist Maeda said that he expects annual wage negotiations to result in a 4% rise, exceeding the 3.58% of last year and paving the way for the central bank to ditch its negative policy rate. According to Maeda, the “virtuous cycle between wages and inflation” that the Bank of Japan is seeking is already in place. Until now, current governor Ueda has defended the ultra-easy policy stance because policymakers aren’t so sure that is indeed the case. Maeda, who left the BoJ in 2020 after playing a major role in the central bank’s initial response to the pandemic, believes rate action could come in the spring (April) without ruling out an earlier move.

Hungary’s Finance Ministry State Secretary in an op-ed on a Hungarian financial news website called for a bigger consolidation effort. While the government does plan to reduce the deficit from 5.9% in 2023 to 2.9% of GDP this year, Péter Beno Banai warned for the probability of revenues missing estimates and expenditures exceeding plans due to base effects. With the current forecast being only just below the EU’s 3% threshold, risks are for Hungary to enter the bloc’s excessive-deficit procedure. That could ultimately end up in the suspension of EU funds at a time when many billions (including from the Resilience and Recovery Facility) are already held back over graft and rule-of-law concerns.