Markets
We can’t but start with the Japanese yen again. Including this morning’s price action, USD/JPY (151.57) is an inch away from the 2022 multi-decade yen lows (at 151.95). EUR/JPY (164.68) already surpassed the 2023 high to trade at the strongest level since 2008. The cautious exit by the BoJ from ultra-easy monetary policy completely backfired. The lack of perspective on follow-up rate hikes when markets increasingly ponder the likes of the Fed’s maneuvering room for cuts in the face of stubborn inflation is a deadly cocktail. BoJ governor Ueda during the press conference yesterday already said that if JPY affects the outlook significantly, he’ll consider a policy response. We fear the BoJ will get there pretty fast. On markets ex-Japan we witnessed some profit-taking on Treasury shorts ahead of the important March Fed policy meeting. Front-end US yields eased a little less than 5 bps, longer maturities lost 0.7-3.2 bps. German Bunds underperformed by shedding 3.3 bps at the front and adding 1.1 bp in the 30-y tenor. Yield differentials and an improved equity sentiment brought the US dollar down from its intraday highs. DXY called off a test of the 104 big figure, EUR/USD rebounded from a low at 1.0835 to close at 1.0866.
It’s Fed-day. But in the run-up to tonight we’ll get some distraction from the 2024 ECB and its Watchers Conference. The three debates center around the inflation surge and whether it is over, monetary policy transmission and the implications of geopolitics & structural change. Speakers include president Lagarde, chief economist Lane and board member Schnabel. UK inflation numbers triggered a kneejerk move lower in GBP on a minor headline (3.4%) and core (4.5%) miss. But above-consensus services CPI (6.1%) complicates the picture going into tomorrow’s Bank of England policy decision. Turning to the Fed, risks are tilted towards a hawkish surprise. Inflation forecasts are to be revised upwards for this (and perhaps next) year against the background of a resilient economy and labour market. Our base case assumes the three rate cuts projected in the December dot plot to show up again in the March edition. But the case for less and a late(r) start is visibly strengthening given that base effects will support inflation readings in the months ahead (through the summer) while financial conditions are the easiest since mid-2022. We’ll also look out whether the median estimate of the neutral rate has finally shifted higher. Ceteris paribus that would mean that any given policy rate level north of neutral is by definition less restrictive than previously thought. This may in particular be of importance for the rate projections in 2025 (4 cuts) and 2026 (3 cuts). Finally: quantitative tightening. The current pace, $95bn/month, could be slowed based on some recent Fed comments. We don’t expect it to materially impact markets to the extent it means the rundown can last longer in the future instead of the Fed being forced to stop abruptly (as in 2018). We believe tonight’s FOMC meeting to sustain the recent momentum in US yields. Moving beyond the YtD highs is likely to trigger a technical acceleration. 4.82% and 4.4% mark the next resistance levels in the 2-y and 10-y tenor. The dollar should easily stand out against the euro, for which the ECB is preparing a June rate cut. EUR/USD 1.0793 is followed by 1.0695 on the technical charts.
News & Views
The US Department of the Treasury yesterday published Treasury International Capital data for January. Total overseas holdings of US Treasuries declined by $32.4bn from a record $8.05tn in December 2023 to $8.02tn. The stockpile of the largest holder of Treasuries, Japan, increased by $14.9bn to $1.15tn. The holdings of number two on the list, China, fell by $18.6bn to $797.7bn after a brief uptick last December. Chinese holdings have been gradually declining since the Trump presidency from levels north of $1.2tn in the 2011-2015 period. UK holdings, completing the podium, were almost flat at $735.5bn. Holdings of the Cayman Islands, proxy for hedge funds accounts, rose by $13.3bn to $318.5bn.
An ECB spokesman told Bloomberg news agency that the ECB will make its internal wage trackers, designed to deliver data on salaries in a speedy manner and often referred to by central bankers, publicly available later this year. ECB president Lagarde put a quite some weight on the outcome of Q1 wage negotiations as key input to determining the timing of a first rate cut. More frequent wage data can help guide markets as the ECB turns to a less restrictive policy in the coming quarters.
