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The payrolls-Powell combo resonated through today’s European trading session in absence of other data/events. It put core bonds under further pressure from the start with US Treasuries underperforming German Bunds. Recall that Powell ruled out a March rate cut with the voiceover of the 60 Minutes interview on CBS suggesting that the Fed will only pull the trigger on rates by the middle of the year (June?!). Despite the significant two-day correction, US money markets are still discounting a 60% probability to a May move with cumulative 2024 rate cuts to the tune of almost 125 bps despite Powell confirming an unaltered FOMC view of 75 bps. Comments by Minneapolis Fed Kashkari strengthened the market pulse. He wrote in an essay that the neutral rates possibly rose during the post-pandemic recovery. It gives the FOMC time to assess upcoming economic data before starting to lower its policy rate with less risk that too-tight policy is going to derail the economic recovery. Policy may not be as tight as assumed given the low neutral rate environment that existed before the pandemic. In the December 2023 FOMC dot plot, 7 out of 18 governors indicated that the neutral rate could be above the 2.5% consensus view in place since mid-2019. The January US services ISM dealt a final blow to US Treasuries. The ISM rebounded more than expected (53.4 from 50.5 vs 52 expected). Details showed first employment growth since November (50.5), accelerating new orders (55) and a rapid increase in prices paid (64 from 56.7). US yields at the time of writing add 10 bps (2-yr) to 14 bps (10-yr). EUR/USD is testing 1.0724 support.

UK Gilts underperform German Bunds as well today. The UK Office for National Statistics announced that it will be reinstating from next week reweighted Labour Force Survey estimates. They incorporate latest views on the size and composition of the UK population and replace experimental estimates in place since October 2023. Under the new data, the UK unemployment rate was 3.9% in the three months through November compared to the previous estimate of 4.2%. From a dynamic point of view, the unemployment rate now shows a declining path since Summer compared with the previous more flattish shape. The outcome suggests that the UK labour market remains more tight than expected with the risk of more upward pressure on growth and (wage) inflation. It complicates the picture for the Bank of England and argues in favour of delaying a potential first rate cut. Sterling initially profited from the rate support against an ailing euro, but GBP/USD losing the bottom of its sideways trading channel (1.26) eventually helped the (EUR/GBP)-pair back towards 0.8550.

News & Views:

Turkish inflation accelerated more or less as expected by 6.7% M/M and 64.86% Y/Y in January, from 2.93% M/M and 64.77% Y/Y in December. Only “clothing and footwear” showed a monthly price decline (-1.61%). A core inflation gauge excluding unprocessed food, energy, alcoholic beverages, tobacco and gold rose by 6.85% M/M and 67.68%. Y/Y. A big increase in the minimum wage, price adjustments at the start of the year and the ongoing TRY-depreciation were important drivers of the inflation acceleration. Last month, the CBRT raised its policy rate by 2.5% to 45% while suggesting that the hiking cycle is over with the current rate being sufficient to bring inflation back under control. High domestic/services-related inflation poses an upside risk to outlook. Thursday’s quarterly inflation report of the central bank offers more guidance on the central bank’s intentions.

The OECD upwardly revised its global growth outlook to 2.9% from 2.7% in November. This still means a slowdown compared with expected growth of 3.1% for 2023. The picture diverges across countries with strong growth in the US and many emerging market economies offset by a slowdown in most European countries. Annual GDP growth in the US is projected to remain supported by household spending and strong labour market conditions, but moderate to 2.1% in 2024 and 1.7% in 2025. EMU GDP growth is projected to be 0.6% in 2024 and 1.3% in 2025, with activity held back by tight credit conditions short term before picking up as real incomes strengthen. Chinese growth is expected to ease to 4.7% in 2024 and 4.2% in 2025, despite additional policy stimulus, reflecting subdued consumer demand, high debt and the weak property market. Headline inflation in the G20 economies is projected to drop from 6.6% in 2024 to 3.8% in 2025, with core inflation seen easing to 2.5% in 2024 and 2.1% in 2025.

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