Regarding the eco data, the US December CPI takes center stage
|Markets
Markets yesterday morning were pondering the chances and/or the potential reach of a revival of the ‘Sell America’ trade as the US Department of Justice served Fed Chair Jerome Powell and the Fed with subpoenas related the renovation of the Fed building. Powell reacted forcefully to what he sees an new attack on Fed independence. In a first reaction in Aisa and Europe, US equities, the dollar and especially the ultra-long end of the curve suffered from rising US risk premia. However, tensions soon eased. If anything it turned out to be only a very light version of Sell America. US equities reversed early declines and even closed with marginal gains (S&P 500 +0.16%). The dollar indeed returned a limited part of its recent rebound. However, at a DXY close of 98.86 and EUR/USD at 1.167 the move was technically insignificant. US Treasuries underperformed Bunds, but bigger early session yield rises ended with a negligible steepening (2-y + 0.2 bps; 30-y +1.5 bps). The 3-y ($58 bln) and especially 10-y ($39 bln) US Treasury auction also met more than decent investor buying interest. Maybe the pushback also from Republican Senators on the attack against Fed independence mitigated the market reaction. In Europe, interest markets extended the recent (corrective?) easing with German yields declining between 1.2 bps (2-y) and 2.6 bps (30-y). Expected softer inflation at the start of the year made markets conclude that the debate on an ECB rate hike is premature.
Especially Japanese markets show rather forceful moves this morning as press reports indicate a growing chance of PM Takaichi calling snap elections that might already take place mid-February. Japanese equities this morning are rising sharply on an the prospect of a potential ongoing fiscal stimulus . At the same time, risk premia at the long and of the yield curve are rising sharply (30-y +8.1 bp to 3.5%). The yen at the same time weakens (USD/JPY 158.9, weakest level of the yen since July 2024). Japanese Fin Min Katayama expressing concerns on this one-way decline of the yen in a meeting with US Fin Min Scott Bessent, for now didn’t provide much support. In the US, President Trump added another layer of uncertainty on already complicated US trade relations as he announced a tariffs of 25% on goods from countries that are doing business with Iran. For now, it is unclear which countries will be affected and how this will be implemented. US (equity) markets take a wait-and-see approach. Futures show negligible losses. Regarding the eco data, the US December CPI takes center stage. Markets expect 0.3% M/M and 2.7% Y/Y both for core and headline inflation. Figures still might feel some noise from the shutdown. We don’t have a strong view on the risk to the outcome. Even so, a big downwards surprise is probably needed to reopen the debate on frontloading additional Fed easing. NY Fed president John Williams in comments overnight at least suggested that after the three consecutive rate cuts in H2 last year, the Fed is now well poisoned to stabilize the labour market and bring inflation back to target. There are few data in EMU, but we look out on any potential spill-overs from the sell-off at the long end of the Japanese yield curve to other markets. In this respect, the US Treasury also sells 30-y bonds. The dollar (except for USD/JPY) shows little of a clear directional trend.
News and views
The European Commission in a plan outlined yesterday is considering a minimum price system for Chinese electric vehicles that would replace current import tariffs. The latter range up to 35% and were introduced after the EC concluded Chinese-made EVs enjoyed an unfair advantage from subsidies at home. Beijing retaliated but negotiations have since taken place to avoid the matter spiraling into an all-out trade war. The plan, under which Chinese exporters submit a minimum price proposal, annual volume limits as well as future investments in the region, all for the EC to then assess, should be seen in this context of defusing tensions.
The British Retail Consortium’s retail sales gauge rose by 1.2% in December, well below the 12-month average of 2.3%. Food sales rose 3.1%. The non-food category posted a 0.3% annual decline with both in-store and online sales falling in yearly terms. Same store sales rose 1% with a similar divergence seen in food (+2.7% y/y) and non-food (-0.5% y/y). BRC’s Chief Executive Dickinson noted “It was a drab Christmas for retailers, as sales growth slowed for the fourth consecutive month.” She explained food sales rose mainly due to ongoing food inflation and added that non-food sales fell flat as gifting items did worse than expected and consumers were holding out for discounts. Dickinson concluded that “These figures show that consumer spending remains cautious, with households squeezed by the rising cost of living. Now is the time to support struggling families […]”.
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