Markets
With US investors returning from the Martin Luther King Holiday, question was whether US markets would join yesterday’s rebound in German yields. Or would they maintain their soft bias as was the case after last week’s CPI and even more US PPI data? Early in Asian and European dealings, US yields indeed copied the move from Germany yesterday. The 2-y tried to regain the 4.2% mark. The 10-y returned to the 4% barrier. German/EMU yields in the meantime eased slightly. Inflation expectations in the ECB consumer survey (November) for the 1-year ahead CPI expectation declined from 4.0% to 3.2%. 3-y expectations also eased more than expected, from 2.5% to 2.2%. On the hawkish side of the equation, ECB Nagel repeated that the ECB still has a way to go on inflation. French Council Member Villeroy, as usual was more balanced but also indicated the ECB is ‘bit more patient’ on rate cuts compared to what markets are pricing. Early in US dealings, the rise in US yields was briefly disrupted by an unexpectedly sharp fall in the NY Fed Empire manufacturing survey (-43.7 from -14.5 vs -5.0 expected). However, the market reaction function this time was different from end last week. US yields easily reversed the initial drop and currently add between 5 bps (2-y) and 9.0 bps (30-y). German yields can’t build on yesterday’s rebound, ceding between 4.0 bps (2-y) and 1.0 bp (30-y). Equities continue trading in red a s first earnings are kicking in. The rise in US yields combined with a fragile risk sentiment this time triggered outright USD strength. DXY jumped north of the 103 big figure (103.15). EUR/USD dropped below 1.09 and is testing last week’s low of 1.0877. A break would single more EUR/USD downside potential. Soft UK wage data published this morning (weekly earnings ex-bonus easing from 7.2% to 6.6%) failed to trigger a sustained rebound of EUR/GBP away from the 0.86 level, which is again under test currently. Tomorrow’s UK CPI data probably have more market moving potential.
News & Views
Polish monetary policy council member Kotecki today countered a proposal by his fellow rate setter last week. MPC Dabrowski suggested that the central bank might need to tighten monetary policy again if inflation rises back to 6%-8% in H2 2024 by either raising rates or selling Polish bonds during pandemic-related QE programmes (total amount of PLN 144bn). Kotecki called the QT proposal completely incomprehensible in a situation of single-digit and falling inflation and could be perceived as the MPC joining in on a political attack and blackmail against the new government. With the latter, he refers to rift between new PM Tusk and Polish president Duda, a nominee by the previous PiS-government. Since pivotal parliamentary elections in October of last year, Duda, who has quiet some vetoing powers, first delayed Tusk’s nomination. Next he vetoed the December budget bill and sheltered two fugitive (PiS) members of parliament in his palace, ignoring a court verdict for abuse of power. Tusk faces a tough balancing act as he doesn’t want to immediately overturn previous PiS-policies with local and European elections scheduled later this year. Presidential elections take place in 2025. The ongoing power struggle made the Polish zloty give back some of the impressive post-election gains with EUR/PLN moving from levels of around 4.33 at the start of the year to currently 4.39.
Canadian headline inflation printed in line with forecasts, dropping by 0.3% M/M with the Y-Y figure nevertheless up from 3.1% to 3.4% (base-year effect with gasoline prices falling more on a monthly basis in December 2022). The big (upward) surprise came from core inflation readings. The Bank of Canada’s preferred trimmed mean gauge accelerated from 3.5% Y/Y to 3.7% Y/Y instead of the hoped for slowdown to 3.4% Y/Y. Rent prices continued to climb, rising 7.7% Y/Y from 7.4% Y/Y. Passenger vehicle prices was the other main driver of core inflation. Another closely watched metric, a three-month moving average of underlying price pressure, rose back above 3% (annualized pace). Canadian swap yields rise by up to 5 bps at the front end of the curve with the loonie profiting (USD/CAD 1.3450 from 1.35 ahead of the release) despite USD strength. The Bank of Canada meets next week. Canadian money markets are less convinced that the BoC will start cutting policy rates as soon as April (preferred scenario ahead of data).
