Eurozone Inflation Surprises Higher, but German Rates Slip
Today’s Financial Markets Highlights
- • The US dollar is weaker against most currencies today as the Fed’s apparent efforts to ease market concerns that its lack of forward guidance beyond a hike next month means that it will choke off growth. The implied yield of the December Fed funds futures is easing for the second consecutive session.
- • Eurozone inflation unexpectedly rose to 5.1%. The market had looked for a decline. Energy played an important role, and the core rate slipped to 2.3% from 2.6%, but not as much as had been anticipated.
- • The 10-year JGB edged higher and there is talk that the BOJ may purchase bonds unscheduled to resist further upside pressure. This does not seem particularly likely to us as officials have recognized the international drivers, while also anticipating higher inflation this year.
- • ADP reports its private sector jobs estimate. Although it diverges from the official estimate in the short-run, last year as a whole it was fairly accurate.
- • Given the large budget and current account deficits and the slowing of the Fed’s purchases (and an end to the net buys next month) the upcoming auctions will be closely watched. Treasury makes its quarterly refunding announcement today.
- • Brazil has pre-committed to hiking the Selic rate by 150 bp. Forward guidance is key, and many expect that the aggressive rate hiking cycle is almost over as the economy begins contracting.
The apparent campaign by Fed officials to calm market fears that its operational flexibility was going to choke growth is having the desired effect. The implied yield of the December Fed funds futures contract is easing for the second session after jumping by more than 25 bp in the previous five-session slide. Tech earnings from Alphabet, Meta, Snap, Pinterest and AMD is helping extend the dramatic recovery in the NASDAQ, where the futures contract is up another 1% today. Most Asian centers are still on holiday, but those markets that are open were all up over 1%, including Japan, Australia, India, Singapore, and New Zealand. Europe’s Stoxx 600 is posting its third day of gains, led today by information technology and financials. The 10-year US Treasury yield is firm a little below 1.80%, ahead of the quarterly refunding announcement later today. European bond yields edged higher after the eurozone’s upside CPI surprise. The dollar is softer against the major currencies. The Scandis are leading, while the Canadian and New Zealand dollars are lagging. Emerging market currencies are more mixed. Turkey and South Africa are heavier, but the Russian rouble continues to recover. It is higher for the fifth consecutive session and has gained around 5% over that span, leaving it about 2% lower on the year. The JP Morgan Emerging Market Currency Index is slightly higher after gaining around 1.2% over the past two sessions. Gold is little changed. It needs to resurface above the $1808-$1810 area to be of note. Oil prices remain firm, with the March WTI contract knocking on $89 ahead of the OPEC+ decision, and after API estimated a 1.65 mln barrel decline in US oil stocks, according to reports. US natural gas prices are fully recouping yesterday’s 2.5% decline, while Europe’s benchmark has steadied after falling nearly 19% over the past two sessions. Copper is lower for the third session.
There are days in which Japan’s 10-year benchmark bond does not trade, but the JGB market is being closely watched now. Yields are slowly creeping up, largely as a function of higher global rates. Some observers expected it to step up its bond buying at today’s operations, but it did not. Still, some are not deterred and warn that the BOJ could conduct unscheduled bond-buying if yields continue to rise. Yield-curve control aims to keep the 10-year yield within 25 bp of the zero. It is being encouraged by the IMF to target a shorter maturity. Japan’s five-year yield is flirting with zero for the first time since the negative rate policy was adopted in January 2016. In our discussions with BOJ officials, we were left with the impression that they would not stand in the way of a global adjustment of rates. Recall that in April, last year’s drop in mobile phone charges will no longer be in the 12-month measure of CPI, which will lift the headline and core rates.
News that Q4 unemployment slipped in New Zealand to its lowest level since 1986 (3.2% vs. 3.3%) underpins expectations for another rate hike at the meeting later this month. Recall New Zealand lifted its cash target rate in October and November by 25 bp to 0.75%. The swaps market sees the RBNZ as the most hawkish central bank this year with nearly 175 bp of tightening priced in over the next 12 months. Most of it (110 bp) is expected in the next six months. The market sees about a 1-in-5 chance of a 50 bp move at its February 23 meeting.
The dollar is approaching important support against the Japanese yen near JPY114.30. It represents a (61.8%) retracement greenback’s gains last week that took it from about JPY113.50 to almost JPY115.70. There may be some support around JPY114.00 but the risk is a return to the JPY113.50 area especially if US yields ease on what is expected to be a soft ADP jobs estimate. The dollar has been unable to resurface above JPY115.00 today, where a $825 mln option expires. Tomorrow there are about $1.9 bln of options in the JPY114.90-JPY115.00 that roll-off. After approaching three standard deviations from its 20-day moving average at the end of last week, the Australian dollar has bounced by this week. It has approached $0.7150 after the pre-weekend low slightly below $0.6970. The $0.7160 area, which holds the (61.8%) retracement of the leg down from the January 22 high (~$0.7280) and the 20-day moving average may offer a nearby cap. The offshore Chinese yuan is enjoying a slightly firmer bias. The US dollar is near CNH6.3640. Recall ahead of the holiday that has shut mainland markets, the greenback settled near CNH6.3680.
Eurozone inflation surprised the market. Rather than fall from 5.0% to 4.4% as the median (Bloomberg survey) projected, it rose to 5.1% a new high. The monthly increase was 0.3%. The market looked for a 0.4% decline. However, this seemed to partly reflect energy prices. The core measures eased to 2.3% from 2.6%, which is not quite as much as expected. Although the euro traded higher on the headline; the swaps market has already turned relatively hawkish on the ECB. It was already pricing 35 bp of higher rates over the next 12 months. And the first hike is fully discounted by late Q3 or early Q4. The ECB meets tomorrow.
The German two-year yield rose 17 bp in the six-day jump that may be snapped today. The yield is slightly softer today, after the CPI report, in what could be a case of sell the rumor buy the fact. Similarly, the 10-year yield has risen from almost minus 0.11% on January 24 to almost 0.04% yesterday, its highest level since May 2019. The yield is a basis point lower on the day near 0.025%.
The euro is extending its recovery after forging a base near $1.1120 are the end of last week and the start of this week. The unexpected rise in the eurozone CPI lifted the single currency to around $1.1315, meeting the (50%) retracement objective of the slide from mid-January’s high near $1.1485. The next retracement (61.8%) is around $1.1345. The Bank of England meets tomorrow too, and the market expected a hawkish hike. Sterling is also extending its recovery from last week’s low near $1.3360. It has approached the (50%) retracement objective of the move lower since the middle of last month, which is found near $1.3555 and the 20-day moving average. The next target is $1.3600.
There is a wide dispersion of forecasts for the January non-farm payrolls out on Friday. The responses in the Bloomberg survey range from -400k to up 250k. The average is a little less than 90k and the median is 150k. ADP gives us its estimate of the change in private sector jobs. The median in the Bloomberg survey is for 184k down from 807k. The ADP does not provide much illumination in the short run. In Q4 21, ADP’s three-month average was 625k, while the official private sector job growth averages a little less than 400k. However, for the entire year, the two timeseries were as tight as could be expected. Pending revision to the December data, the BLS estimated an average increase of 500k private sector jobs a month, while the ADP estimated a 514k average.
More Fed officials have been speaking, and no one seems to be endorsing a 50 bp increase in March. This is even true of the hawk Bullard, who appears inclined for five hikes this year. Recall that in December, there were two dots (Fed views) pointing to 125 bp increase in rates this year. The December Fed funds futures four hikes fully discounted and 80% chance of the fifth. Yesterday, the implied yield of the contract fell for the first time since the FOMC meeting began last Tuesday. Through Monday, it had risen 28 bp.
News that Lujan, a Democratic Senator from New Mexico suffered a stroke, requiring surgery, is a personal tragedy with political implications. His absence leaves 49 Senators in the Democratic caucus. This seems to strike party-line voting–legislation as confirmations. This also includes the China bill that also looks to aid the US chip industry. The GOP is pushing back on grounds that it is too easy on Beijing. There is also a bill looking to specify sanctions on Russia if it invades Ukraine. The White House appears to be pushing against it, preferring to retain some strategic ambiguity to ostensibly strengthen deterrence.
The Canadian dollar is trading quietly in a narrow range around yesterday’s settlement (~CAD1.2685). The greenback traded down to around CAD1.2655 yesterday but the downside momentum eased. Nearby support is seen in the CAD1.2625 area, which houses (50%) retracement objective of the US dollar’s bounce in the second half of January and the 20-day moving average. The greenback is extending this week’s losses against the Mexican peso. The break of the MXN20.52 area could spur an initial move toward MXN20.40. Brazil’s central bank has pre-committed to hiking the Selic rate by 150 bp to 10.75% later today. Its forward guidance is arguably more important than the widely expected hike. With inflation falling for the past two months, ideas that the tightening cycle is almost complete has encouraged flows into the Brazilian assets. The Brazilian real has appreciated by almost 5.9% this year coming into today, second only the nearly 6.1% gain of the Chilean peso. Yesterday, the dollar fell to about BRL5.2650, its lowest level since last September. The next area of chart support is seen around BRL5.20.
Bannockburn Global Forex