Markets
The goldilocks outcome of January University on Michigan consumer confidence ended a week of weakness in US Treasuries (and core bonds in general). The headline figure unexpectedly jumped from 69.7 to 78.8 (vs 70.1 expected; highest level since July 2021), backed by both better current conditions and a more rosy view for the next 12 months. Both short (1y) and long term (5-10y) inflation expectations declined, respectively from 3.1% to 2.9% (lowest since early 2021) and from 2.9% to 2.8%. Daily changes on the US curve varied between +3.2 bps (2-yr) and – 3.6 bps (30-yr). The front end of the curve still underperformed as more Fed governors pushed back against aggressive rate cut pricing. Atlanta Fed Goolsbee was the latest, suggesting that markets may have put the cart before the horse on cuts. SF Fed Daly added that monetary policy and the economy are in a good place so the Fed can be patient. She thinks that it’s far too early to declare victory on inflation. The market implied probability of a March Fed rate cut fell to 40%, coming from 80% at the start of the year. US equity markets rallied into the weekend following the Michigan release, gaining 1% (Dow) to 1.70% (Nasdaq). The S&P 500 added 1.23% to a fresh all-time high. The US dollar faded into the weekend with EUR/USD closing just below 1.09.
Today’s eco calendar is completely empty. Focus shifts to first major central bank gatherings of the year. Chronologically, the Bank of Japan has a first go tomorrow. Rumours suggested downward revisions to the near term growth outlook and the near/medium term inflation outlook. Together with uncertainty related to external events like the severe earthquake, it suggests that the BoJ is in no hurry to implement a real policy U-turn (ending negative policy rates). The Japanese yen is the biggest victim of this continued soft stance in combination with new weakness in core bonds. The Bank of Canada convenes on Wednesday. December Canadian inflation data unexpectedly showed new momentum in underlying price trends, suggesting the BoC won’t be able to flag a rapid start to policy rates cuts. They could nevertheless turn somewhat more neutral as they still vowed to raise the policy rate (5%) further if needed. On Thursday, the duo of Norges Bank and ECB decide on monetary policy. A faster-thanhoped Norwegian disinflation process and a slightly stronger NOK could prompt the Norges Bank to pull its Dec 2024 first rate cut call forward in time. ECB President Lagarde pushed back against aggressive market expectations at the WEF in Davos. She suggested a first rate cut only in summer. Media concluded that European central bankers are preparing a June rate cut, with the jury still out whether June 6 can already be labelled “summer”. If not, our view, we’re talking about a July rate cut at the very earliest with markets still convinced about an April move. We expect Lagarde to hold this week’s line which should underpin this year’s trend (higher) on interest rate markets.
News and views
The European Commission will on Wednesday unveil a proposal with rules that aim boosting its power to screen and potentially block foreign investment in sensitive industries. The EC is also said considering the creation of a fund to increase development of technologies both for miliary and civil purposes. The proposal comes as the covid pandemic and geopolitical developments over the previous years highlighted Europe’s trade vulnerabilities and the region’s reliance of supplies from other countries.. According to Bloomberg, this week’s package will include five initiatives including strengthening of foreign direct investment regulation, coordination of export controls, options to support research of dual-use technologies, Ideas to improve research security and firs steps toward a new tool to control leaks of sensitive know-how to adversaries through European investments overseas.
Chinese Banks held their benchmark lending rates unchanged at 3.45% for the 1y loan prime rate and 4.20% for the 5y loan lending rate. The new pricing follows after the PBOC last week unexpectedly kept the rate on its medium term lending facility unchanged at 2.4%. This decision came even after recent data showed that the economic recovery struggles to gain further traction and as several indicators show deflationary tendencies. However, the PBOC apparently wants to avoid a further deprecation of the currency. The yuan eases marginally this morning to USD/CNY 7.1965. It finished 2023 at USD/CNY 7.10.
