Markets
US eco data were too plenty yesterday to give a clear signal for trading. Markets initially singled out disappointing US retail sales, which declined more than expected in January (-0.8% M/M vs -0.2% M/M). Sales in the control group, used as a proxy for consumption in GDP calculations, fell by 0.4% M/M. US Treasuries tried to rally on the release with the dollar spiking lower. US equity markets had a wobbly start, but soon started marching higher again. The moves on Treasury and FX markets petered out as well given that weaker retail sales were flanked by improving regional business surveys (NY & Philadelphia), accelerating import/export prices and another low figure of weekly jobless claims. US yields eventually ended around 2.5 bps lower across the curve with an underperformance of the front end of the curve (2-yr -0.4 bps). Today’s US calendar is again jampacked with housing starts, building permits, producer price inflation and University of Michigan consumer confidence. From a market point of view, PPI figures will likely trigger the instinctive reaction (like US retail sales yesterday), but the abundance of signals makes a strong directional move again rather unlikely especially with the long US weekend ahead. Markets are shut on Monday for President’s Day. Technically, we assume that breaks above key resistance levels in yield terms will be confirmed into this week’s close.
US Treasuries face some selling pressure overnight with comments by Atlanta Fed governor Bostic resonating. He warned that it will take some time to hit the 2% inflation target, even if the January CPI report from earlier this week turns out to be an aberration. Bostic is considered as a neutral FOMC member and surprised by suggesting that the room for a first rate cut could only open up in July (!). He advocates only two rate cuts this year, compared with the median Fed projections of three such moves. The December Summary of Economic Projections showed 8 out of 19 Fed members sponsoring only a maximum of two cuts this year. The January Fed meeting, Powell’s appearance in 60 Minutes, a stellar payrolls report and January CPI data forced money markets to shift focus/bets on a first move from March to June which is thus still too soon according to Bostic. Markets will be closely screening comments by Richmond Fed Barkin and SF Fed Daly later today for more such time-specific comments.
Strong January UK retail sales push sterling and UK yields higher at the start of today’s trading. Retails sales rose 3.4% M/M vs 1.5% consensus. They add some more volatility to an interesting trading week with strong labour market figures, disappointing Q4 GDP and somewhat better inflation figures. We nevertheless expect EUR/GBP 0.85 support to survive.
News & Views
“We have to spend more, we have to spend better, we have to spend European.” The president of the European Commission von der Leyen in an interview with the Financial Times called for a European approach to a currently very fragmented defense market divided on national lines. But increased geopolitical threats require Europe’s military industrial complex to be geared up in terms of size and efficiency. The EC is developing a strategy akin to the one where taxpayer cash was used for the production of Covid vaccines and joint purchases of gas. Proposals in the plan as such focus on using the budget to subsidize the sector. The interview does not touch upon tapping capital markets as a way to finance defense spending on a European level. But one can clearly see the potential of doing so in way similar to EUNextGen.
The Fed’s reverse repo facility usage fell below $500bn for the first time since mid-2021. While that level is mainly symbolical, it marks a sharp drop from the +$2250 bn peak levels seen between mid-2022 and mid-2023, when market participants stored excess cash awaiting the end of the Fed’s historical tightening cycle before investing it elsewhere. The drawdown accelerated after the US Treasury ramped up bill issuance, serving as a short-term alternative, after the suspension of the debt ceiling in June. The RRF caught extra market attention after Dallas Fed president Logan in January referred to it as a measure of excess reserves serving as important input in the discussion to slowdown the pace of quantitative tightening (currently $95bn/month).
