ECB governors also enter the black-out period ahead of next week’s policy meeting


Yesterday’s, the news flow unidirectionally supported recent central bankers’ mantra that there is no case to rush for early and/or outsized rate cuts any time soon. UK inflation unexpectedly rebounded with both core inflation (5.1%) and services inflation (6.4%) making no progress towards the 2.0% target. US retail sales came out much stronger than expected. This perfectly illustrated Fed Waller’s assessment earlier this week that US economic activity remains in good enough shape for the Fed to take a cautious approach both on the start and the pace of the easing cycle. ECB’s Lagarde in Davos indicated that it will take till the summer before the ECB will be in a position to be sure that inflation is back on a path to sustainably move the bank’s inflation target. Yields curves in the US, EMU and the UK staged an impressive bear flattening/inversion move. US yields changed between 14.1 bps (2-y), and 1.7 bps (30-y). Markets scaled back expectations for a March Fed rate cut to about 50%. Later in the session, the Fed Beige book indicated that there was little change in economic activity. At the same time, holiday sales held up well and contact indicated that the prospect of Fed rate cuts is a source of optimism going forward. German yields added between 9.8 bps (2-y) and 0.4%(30-y). Moves in the UK were even more impressive with the 2-y jumping 21.5 bps higher while the 30-y still added 15.5 bps. The prospect of a less aggressive scaling back of policy tightening weighted on equities (Eurostroxx 50 -0.98%, S&P 500 -0.56%). The congruent rise in yields across major markets prevented the dollar to fully profit from its safe haven status. DXY gained modestly (103.45). EUR/USD briefly dropped below the 1.0875/65 support area, but reversed the intraday decline closing even marginally higher at 1.0883). The yen understandably underperformed with USD/JPY closing north of 148.

This morning, Asian equity markets are trading mixed, despite yesterday’s WS setback. US yields decline 1-3 bps. After yesterday’s ‘unconvincing’ gains, the dollar this morning ceding some ground (DXY 103.18, EUR/USD 1.09). Today, the calendar is less inspirational than was the case yesterday. In the US, building permits, housing starts and jobless claims will be published. No key eco data in EMU. ECB governors also enter the black-out period ahead of next week’s policy meeting. Fed’s Bostic speak on the economy. Even so, today’s calm calendar still might give some indication whether the bottoming out process especially in ST yields (US and EMU) is getting stronger footing. The US 2-y rebounding above 4.39% (23% retracement since top October) would give some more comfort. In FX, the dollar couldn’t maintain recent upside momentum. EUR/USD failed to sustainably break below the 1.0775/65 support area, indicating no clear directional moment for now.

News and views

Australian employment last December fell by the most since the pandemic months. The economy shed some 65.1k jobs. An even bigger setback in full-time employment (-106.6k) was partially offset by a rise in part-time jobs (+41.4k). Australia’s Bureau of Statistics signals, however, that the fall comes after a strong October and November growth. The unemployment rate stayed at 3.9% and the participation rate holds near historic highs even as it dropped a little (to 66.8%), suggesting ongoing tightness on the labour market. In a sign of some relieve, hours worked continued its gentle (but choppy) downward trend since April 2023. Australian swap yields dipped on the release before recouping several bps shortly thereafter. Current changes amount to less than 1.5 bp across the curve. Money markets still bank on a first rate cut no sooner than September. The Aussie dollar followed yields, dropping at first before trading higher on the day. AUD/USD is currently changing hands around 0.656.

UK Prime Minister survived a key vote on his immigration plan in Parliament late yesterday. Earlier this week, almost 60 Tory rebels revolted against what they considered a not tough enough bill to tackle illegal immigration. The open backlash weakened the PM’s position in an election year and at a time the Tory party is trailing Labour Party in opinion polls. In the end, only 11 voted against the legislation in the Lower House with many of the others fearing that doing so would topple the government, triggering early elections. Sunak didn’t want to give in to the hardliners, fearing that the UK would break international law otherwise. In its current form, migrants who arrive illegally in Britain, face being sent to Rwanda to have their asylum claims processed. The saga isn’t over yet as the House of Lords has yet to vote on the matter.

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