Amid a very thin eco calendar, core bonds yesterday found some relief after the self-off that started with Powell’s push back against early rate cuts last Wednesday, reinforced by an exceptionally strong payrolls report and solid services ISM afterwards. Technical considerations also were in play with YTD top levels in yields at several maturities nearby (both in the US and in EMU). Fed Mester said she expects the Fed to get confidence to cut rates later this year, but at the same time indicated that policy currently is in a good place and that it would be a mistake to cut rates too soon. She still holds to the December to plot, expecting three rate cuts this year. She didn’t seem in a hurry to reduce the pace of the balance sheet roll-off. Minneapolis Fed Kashkari also took notice of the progress that has been made on inflation but also maintained the mantra that the Fed didn’t reach its goal yet. This kind of balanced comments understandably were not enough to push yields beyond key resistance levels. Bond gradually gained traction. The $54 bln 3-y US Treasury action also went smoothly on recent cheapening. US yields finally eased between 7.4 bps (5-y) and 3.7 bps (30-y). Moves in Bund yields were more modest, declining between 1.0 bp and 2.5 bps across the curve. US equity indices held near recent peak levels (S&P 500 +0.23%). The Eurostoxx50 even touched a new multi-year top (+0.76%). Easing global yields and a mild risk sentiment also capped the ascent of the dollar. The DXY index struggles to hold above the 104.00/25 previous resistance area (close 104.21). EUR/USD for a second consecutive day tested the 1.0724 December correction low, but in the end the 1.0712/24 support survived (close 1.0755). Cable tries to reverse Monday’s break below 1.26 range bottom (close 1.2598). EUR/GBP also reversed part of Monday’s rebound to close at 0.8637.
Asian equities mostly trade with modest gains this morning. Chinese investors still ponder the impact of the authorities to arrest the equity sell-off (CSI 300 +0.63%). Later today, there are again few data with market moving potential in US and EMU. We look out whether there are any further spill-overs of Moody’s cutting the rating of New York Community Bancorp to junk to broader (US) equity sentiment. Fed speakers include governors Kugler, Collins, and Barkin. In an interview with the FT, ECB Executive Board Member Isabel Schnabel warned that lower borrowing costs could cause inflation to flare up again, given a good reason against the ECB adjusting the policy stance hastily. Regarding trading today, it probably will remain difficult for yields to break above YTD peak levels without any high profile news. The dollar rally also slows but given underlying euro weakness, at test of the EUR/USD 1.0712/24 remains possible.
News & Views
New Zealand employment grew a faster-than-expected 0.4% q/q in Q4 2023. This followed a contraction by 0.1% in Q3. The unemployment rate ticked higher to 4%, matching the post-GFC and pre-pandemic high. The small uptick was nevertheless smaller than analysts (4.3%) foresaw, partially due to an unexpected decline in the participation rate to 71.9%. Both employment growth and the unemployment rate were also better than the Reserve Bank of New Zealand expected in its November forecasts. Combined with wages easing more slowly (to 3.9% y/y vs 3.8% expected) and stubborn (non-tradeable/services) CPI, it may prevent the central bank from dropping its hawkish bias and turn more neutral when it meets on February 28. The kiwi dollar reacted stoic to the labour data. USD/NZD is going nowhere just north of 0.61. New Zealand swap yields do add more than 5 bps at the front.
The Japanese government’s chief economist Hayashi said the Bank of Japan can retain its focus on beating deflation even if it were to phase out its ultra-easy monetary policy that still includes negative policy rates. The current BoJ framework is based on a 2013 pledge with the government to achieve the 2% inflation target “at the earliest date possible”. That has now come into question several times since inflation has been above 2% for more than a year now, prompting speculation of a near-term exit from the current policy stance. A positive wage-inflation cycle is critical for the BoJ to do so. According to Hayashi, this will be the case if this year’s wage growth, for which negotiations are ongoing, exceeds that of last year. The government as a result formally declaring an end to deflation could trigger further expectations for such a BoJ shift.