Sunset Market Commentary

Markets

Core bonds, US Treasuries in particular, opened higher in an attempt to recoup some of the Powell-Payrolls-ISM triple whammy they suffered over the previous days. But US yields shedding between 0.1 and 3 bps across the curve is nothing compared to the 30bps+ they gained in just two trading days. Technically, the likes of the 2- and 10-year remain close to the (be it early) YtD (intraday) highs. A leap higher today was going to be difficult anyway given the lack of market moving events planned. We do note that some Fed speeches (Mester, Kashkari, Collins) are due after wrapping up the report as is the $54bn 3-year Note auction. Sticking to auctions, the Kingdom of Belgium announced a new syndicated benchmark bond (tomorrow), maturing June 2055. It’s the second out of three planned for this year with the remaining one having a medium-term maturity. The ECB’s December consumer inflation expectations survey is worth mentioning as well, despite leaving no traces whatsoever on markets. The series has been expanded with five countries and showed the one-year ahead gauge to have eased further from 3.5% (revised upwards for comparison reasons) to 3.2%. The three-year forward looking series ticked higher from 2.4% to 2.5% and remains above the 2% medium-term target, suggesting policymakers should rightly so not lower their guard just yet. Economic growth expectations for the next 12 months remained unchanged at -1.3% while expectations for the unemployment rate 12 months ahead decreased to 11.2%, from 11.4% in November. In terms credit access, the series hit a high, indicating increased tightness but consumers expect easier access in 12 months’ time than thought in November. German yields basically flatline with a minor underperformance at the long end within a 3 bps sideways trading range at the time of writing. Stocks inch about half a percent higher in Europe and open virtually unchanged on Wall Street.

Currency markets show similar lack of guidance. Cable (GBP/USD) was perhaps the most interesting one to follow up after yesterday’s break below 1.26, which marked the lower bound of a sideways trading range in place since mid-December. Sterling prevented technical follow-through losses however. GBP/USD rises marginally to 1.256. The EUR/GBP mirror image shows the pair all but fully erasing yesterday’s uptick back to 0.854. The euro trades in the defensive against the dollar as well. EUR/USD eases further and prepares for the lowest close around 1.0735 since mid-November as the 1.0724/12 support area looms.

News & Views

Cocoa futures hit the highest level since 1977 ($5288 a metric ton) earlier this week, extending their astronomic surge since end 2022 ($2200 a metric ton). The latest 5% leap came after Ivory Coast government data suggested that farmers delivered less cocoa to local ports. Arrivals in the season that started October 1 totaled 1.04mn tons compared with an estimate of about 1.71mn a year ago. Production levels from neighboring country Ghana are way below last year’s levels as well with seasonal Harmattan winds – cool dry wind that blows from the northeast or east in the western Sahara and is strongest from late November to mid-March – drying out cocoa fields in both nations and further tightening global supply. Last year, Ivory Coast and Ghana were respectively responsible for 44% and 14% of global cocoa bean production.

Minutes of the previous policy meeting of the Brazilian central bank (BCB) confirmed the intention to cut policy rates at the following two meetings by 50 bps each, sticking with the pace in place since August of last year when the BCB started reducing its policy rate from a 13.75% peak level to currently 11.25%. The recap of the January meeting showed that the central bank will especially pay attention to developments in (sticky) services inflation and in a (temporary?) acceleration of real wage gains. Upside inflation risks related to weather events like El Nino have been downscaled. The Brazilian economy slowed last year, but high frequency indicators suggest a better start to this year. When it comes to future policy decisions, the BCB distances itself from future monetary policy and rate decisions by the Fed. There’s no mechanical link between the two. USD/BRL yesterday tested the psychologic 5 mark which is also this year’s YTD high on genuine USD strength. The attempt has been blocked for now.