Markets
Strong US payrolls published on Friday continued to dominate sentiment for global trading. The report confirmed Fed’s ‘guidance’ since the December meeting that it has plenty of room to assess the timing for additional easing. In this respect, the December US CPI inflation data to be published on Wednesday will be key in setting up the next big market move. A new upward surprise might cause markets to fully price out all remaining 2025 rate cuts and even cause market talk on the need for some tightening to resume. We’re not there yet, but underlying sentiment remains bearish. Core yields this morning again added a few basis points, but with hardly any important eco data scheduled for release today, investors are ‘happy’ just to digest the recent sharp repricing for now. US yields rise 1-2 bps across the curve. The German yields curve steepens slightly with yields little changed at the short end of the curve and as the 30-y adds 1.5 bps. Brent oil extending gains beyond $ 80 p/b after the US announced additional sanctions against Russian oil exports didn’t help to mitigate lingering inflation worries. Tightening of financial conditions this time also outweighs recent market optimism on ongoing strong US growth. After declining, 1.5% already on Friday, US equities again open in red (S&P 500 -0.9%, Nasdaq -1.6%).
Higher US real yields and a risk-off sentiment are supporting the dollar, but gains are not unequivocal across all USD cross rates. The DXY index near 110 is trading at the strongest level since November 2022. EUR/USD intraday briefly dropped below the 1.0201 level (62% retr. 2022/2023 rebound). The pair tries to avoid a sustained break but momentum suggests a revisit of parity (or below) is ever more likely. The jury is still out, but US equities also being captured in the broader risk-off move apparently causes investors to reassess the yen’s safe haven virtues. USD/JPY is easing from the 158 area to trade near 157.2. At the other side of the FX spectrum, sterling (and Gilts) continue to fight an uphill battle. UK Prime Minster Starmer explicitly supporting Fin Min Reeves’ policy and committing to rules of financial orthodoxy doesn’t help to address investor concerns on fiscal sustainability and on inflation staying too high for too long. ST UK yields are rising up to 4.5 bps (2-y), but this higher risk premium understandably still doesn’t help sterling. Cable tested the 1.21 area. EUR/GBP regained the 0.84 barrier (0.841). UK CPI will also be published on Wednesday. An new upside surprise almost certainly will cause more damage too overall UK markets.
News & Views
Czech inflation fell 0.3% M/M in December whereas consensus expected a 0.1% monthly gain. Lower prices in “food and non-alcoholic beverages” and in “alcoholic beverages and tobacco” were the main culprit. Prices of goods in total decreased by 0.5% (to be up 1.7% Y/Y) while prices of services remained at the level of November (5% Y/Y). In Y/Y-terms, headline CPI rose from 2.8% to 3%, the fastest pace since end 2023 but less than the feared uptick to 3.3%. Average 2024 inflation as a whole was 2.4%. The Czech National Bank commented on the inflation figures which were below the central bank’s autumn forecast (+3.3% Y/Y). Food price inflation was weaker in particular (3.3% Y/Y vs 4.8% Y/Y), but core inflation was also somewhat lower than forecasted. (2.3% instead of 2.4%). Services inflation nevertheless remains a worry because of elevated wage growth. The Czech krone weakened in the wake of the inflation report (EUR/CZK 25.20 from 25.05) as it gently reopens the door to a February policy rate cut after the CNB paused its cutting cycle in December. That feeling was strengthened by comments from influential CNB vicegovernor Zamrazilova who welcomed the pleasant inflation surprise and added that there is a rising chance that the CNB may resume its policy easing early in 2025. Czech swap rates lose up to 6 bps at the front end of the curve. Key things to watch apart from CNB comments are Q4 GDP (Jan 31st) and the January inflation report (Feb 6).
Indian inflation declined 0.56% M/M in December with the Y/Y-figure slowing down from 5.48% to 5.22%. The decline was largely driven by lower price gains for vegetables, pulses and cereals. Core inflation eased slightly from 4% Y/Y to 3.9%. Today’s data strengthen the view that new RBI governor Sanjay Malhotra at its first meeting in charge will implement a policy rate cut to start supporting slowing growth. In public comments, he has revealed himself as being more dovish than outgoing chair Das. The Indian rupee trades at an all-time low against the dollar today (USD/INR 86.50) but today’s significant sell-off is more because of the global rising interest rate environment and because of the two-day surge in oil prices (Indian being energy-dependent) than due to the inflation data.
