Market
German bunds heavily underperformed US Treasuries yesterday. Yields jumped between 4.6 and 6.4 bps in a response to ECB board member Schnabel’s interview with the Financial Times. The influential policymaker isn’t so sure anymore that monetary policy is still restrictive after the January rate cut to 2.75%. Amongst others she’s referring to the bank lending survey, which shows lending is picking up, and that we are in a situation of transformation (high & rising public debt, huge digital and climate investment needs and increasing global fragmentation) that is reversing the downward trend of the neutral rate. For Schnabel the policy rates’ travel of direction (lower) is therefore no longer that obvious. Her comments have opened up the debate in the long run-up to the March meeting. We expect the rate cut then to be followed by a pause at least through April, ending the back-to-back sequence since September. US rates declined up to 4.2 bps. The front end of the curve slightly outperformed following the FOMC January meeting minutes even though they only confirmed what Fed officials have been saying over the past few weeks: additional cuts come only when inflation shows further progress. EUR/USD ignored the improving rate differentials and inched lower on a poor (European) equity performance instead. The pair closed at 1.042. JPY secured the first place amid hawkish talk coming from BoJ board member Takata. USD/JPY eased to 151.5 with losses technically accelerating this morning to 150 as investors brace for tomorrow’s Japanese inflation figures. Comments by BoJ governor Ueda – didn’t discuss rising yields at regular meeting with PM Ishiba – are interpreted as a thumbs up to more rate hikes. UK inflation figures yesterday helped push up gilt yields several basis points even though BoE governor Bailey flagged the CPI quickening a day in advance. EUR/GBP treaded water around 0.828.
Today’s economic calendar is of secondary importance with the weekly US jobless claims and the Philly Fed business outlook. Consumer confidence in the Europe is due. None of those will move the market needle, let alone break the stalemate in (US) bond markets. A slew of ECB and Fed speeches is a wildcard for trading though. President Trump remains a notorious source of volatility. His after-market comments yesterday are a case in point. After slapping China with 10% of import tariffs, he said a deal with the country is still possible. It’s triggered some CNY strength this morning (USD/CNY 7.27).
News & Views
The Australian unemployment rate in January rose from 4.0% to 4.1%, the country’s statistics bureau ABS reported, but underlying dynamics in the labour market remain strong as the rise coincided with a rise in the participation rate. The latter reached a record high of 67.3%. It is now 0.8% higher compared to the same month last year and even 1.8% higher compared to March 2020, before the start of the corona crisis. Employment in January rose a much stronger than expected 44k, due to a rise in full employment. ABS also analyses that “The trend unemployment rate remained at 4.0% in January. It has been within a relatively narrow range of 3.9 and 4.1% for the past 12 months. In trend terms, employment grew by around 34k people (0.2%), which was at the same rate as the 20-year pre-pandemic average (0.2%).” Ongoing solid labour market data confirm the guidance of the RBA that even after starting its easing cycle with a 25 bps rate cut (to 4.10) earlier this week, that it is too early to engage in a protracted rate cut cycle. In this respect, RBA Deputy Governor Hauser this morning repeated that the RBA still has work to do to bring inflation back to target. He indicated that the RBA probably won’t meet its inflation target if it were to follow the rate cut path currently discounted by markets.
The British Retail Consortium consume confidence indicator for the country declined further. The balance indicator declined to -37, the lowest level since the new Labour government took office. It was at +2 when the government took office last year. Half of the Brittons expect the economy to worsen in the next three months with only one-in-eight expecting a pick-up. “With many businesses warning of the impact that April’s employer national insurance contributions increase will have on hiring, and the rising energy price cap pushing up the cost of domestic bills, it is little surprise that many households are worried,” Helen Dickinson, chief executive of the BRC is quoted.
