Markets
Broader markets recovered from the big post-CPI swings yesterday in absence of new drivers. US Treasuries rebounded, but technical breaks through resistance levels (in yield terms) weren’t undone. US yields eventually returned 8.5 bps (3-yr) to 2.8 bps (30-yr). Dovish Chicago Fed governor Goolsbee downplayed the upshot in monthly inflation dynamics, saying that inflation can be a bit higher while still being on track to 2%. He doesn’t support waiting until the 2% inflation goal before cutting policy rates, labelling monetary policy currently as being quite restrictive. Finally, he emphasized that the Fed’s inflation goal in based on PCE deflators and not on this week’s published CPI inflation. The January stickiness of (CPI) inflation was partly because of shelter which has a far bigger weight in CPI calculations compared to the way PCE deflators are constructed. January PCE data will only be released on February 29. Washington-based Fed governor Barr (vice-chair for supervision) after (US) market close backed the official Fed guidance that more good data are needed before begin the process of reducing policy rate. A careful approach is needed given the limited historical experience with current growth and inflation dynamics. He welcomed goods price deflation which helped pull inflation off peak levels, but suggests that that trend has played out. He hopes on ebbing housing inflation and moderating wage growth to help pull services inflation down. ECB vice-governor de Guindos and Bundesbank Nagel held their respective neutral and hawkish views. Central bank focus will today shift to ECB President Lagarde’s hearing before the Committee on Economic and Monetary Affairs of the European Parliament. US eco data are plenty including retail sales, the empire manufacturing survey, Philly Fed business outlook, weekly jobless claims, export/import prices and industrial production. We expect data on balance to put US Treasuries back under selling pressure.
European and US stock markets recovered as well yesterday, gaining 0.5% to 1%. EUR/USD set a new YTD low at 1.0695 before rebounding towards 1.0730. EUR/GBP went on a two-day rollercoaster ride, testing 0.85 on strong labour market data on Tuesday, but swinging back to 0.8550 yesterday on slightly better inflation figures. Disappointing Q4 GDP data this morning suggest that yesterday’s market direction will be the dominant one today as well. GDP declined by 0.3% Q/Q (technical recession) with investments (+1.4% Q/Q) failing to make up for declining consumption (-0.1% Q/Q) and (net) exports. On top, Q3 GDP data faced downward revisions.
News & Views
Australian employment barely grew in January. Only 0.5k jobs were added, a fraction of the 25k rebound that was expected following a sharp drop in December (-62.7k). A slightly bigger rise in full time employment compensated for a drop in part-timers. The unemployment rate rose from 3.9% to 4.1%, topping the 4% mark for the first time since January 2022. Head of Australia’s labour statistics bureau Jarvis nuanced however, by saying that this “coincided with a higher-than-usual number of people who were not employed but who said they will be starting or returning to work in the future.” The participation rate remained steady at 66.8%, below the 67.3% record high of November last year but well above pre-pandemic levels. Monthly hours worked fell by 2.5%, which Jarvis attributed to changing market dynamics around the summer holiday period (more people taking annual leave). The Australian dollar lost some ground in the wake of the underwhelming report. AUD/USD after touching the 0.65 big figure returned to 0.648 currently. Australian swap yields ease between 6.7 and 7.9 bps across the curve. A first rate cut is for 96% priced in at the June meeting. This compared to over 60% just yesterday.
Japanese GDP unexpectedly contracted in Q4 of last year. Shrinking 0.1% q/q after a -0.8% contraction in Q3 puts the island in a technical recession. Net exports’ contribution was insufficient to make up for weak business spending and private consumption. Waning demand complicates the picture for the Bank of Japan which is looking to exit its ultra-easy monetary policy. While today’s data doesn’t derail those plans per se, it does suggest the window of opportunity may be closing. The Japanese yen advances this morning but that has more to do with intervention speculation after USD/JPY topped the 150 barrier two days ago. The pair is still hovering north of that level as of this morning.
