December Payrolls report will get most of the market attention

Markets

The partial absence of US investors due to a national day of mourning for ex-president Carter and the empty economic calendar kept markets squarely focused on the UK. Gilt yields gapped another 12 bps higher at the open before paring most of those gains into the close. The earlier surge nevertheless means multi-year or even -decade highs. Breeden from the Bank of England was the first to comment but wouldn’t go much further than saying they are monitoring what is happening and that the moves reflect a lot of “global factors”. The genie appears to be out of the bottle for sterling. EUR/GBP tested the 0.84 big figure. The pound has the easing of the gilt sell-off to thank for avoiding the technical break (EUR/GBP 0.8368). Cable’s picture looks much more dire. The 2024 GBP/USD low of 1.23 was cracking and succumbs in Asian trading this morning. GBP/USD 1.228 trades at the weakest level since November 2023 and marches closer to an important support area around 1.225 (38.2% retracement on the 2022- 2024 ascent). Rates in Europe added a few basis points in a bear flattening move (up to 3 bps in Germany) compared to a liquidity-thinned bull steepening in the US with moves from -2 bps to flat. Currency markets ex GBP were a sea of calm.

Asian-Pacific dealings lacking much other news revolve mostly around the PBOC announcement (see News & Views) to suspend bond buying. All eyes are on US economic agenda for today. The University of Michigan’s consumer confidence indicator (January) is scheduled but it’s the December payrolls report that’ll get most of the market attention. We think risks to the 165k consensus are skewed to the upside. The front end of the US curve is at a stalemate with markets already positioned more hawkish than the Fed (40 bps of cuts priced in compared to 50 bps in the dot plot). Similarly we do not think that a downside surprise would suddenly prompt a material dovish rebalancing. Recent Fed speak was clearly in favour of a prolonged pause at the current level of rates. The long end is most vulnerable for further losses in case of a topside surprise. Important resistance in the 10-yr yield is located at 4.73%. A break implies a return towards the 2023 high of 5.02%. Dollar strength remains our base case. With the euro not yet ripe for a rebound from its own making, south is the past of least resistance in EUR/USD. 1.0226 is the reference to watch.

News and views

The People’s Bank of China (PBOC) this morning announced that it suspends its Treasury Bond purchases. In explaining the move, the PBOC said that supply of bonds has fallen compared to demand, triggering a shortage in the market. Bond purchases since last year gained in significance as a tool to manage market liquidity as the central bank tried to ease monetary conditions to support the ailing economy. However, the subsequent sharp decline in yields is seen as a factor putting additional pressure on the currency. The run on (long-dated) bonds can also be seen as a sign of investor doubts on the ability of authorities to address current deflationary trends. Chinese authorities showed unease with the financial stability risks related to a stretched bond positioning in the market (risk for a crash). The central bank left the timing open of a resumption of its program which. It will take place at a proper time depending on supply and demand in the government bond market. In a first reaction, the 10-y Chinese government bond yield jumped 4 bps to 1.68%, but the gain dwindled as trading continued. The yuan trades little changed near recent lows at USD/CNY 7.332.

Inflation in Mexico declined eased further in December printing at 0.38% M/M and 4.21% Y/Y. The latter marked the lowest level since February 2021. Core inflation reaccelerated to 0.51% M/M and 3.65% Y/Y. The central bank of Mexico aims to keep inflation at 3.0% with a 1.0% tolerance band. The data most likely will allow the bank to continue its easing cycle. The central bank cut its policy rate in December by 25 bps to 10%. It started its easing cycle in March of last year at 11.25%. The Minutes of the December policy meeting yesterday showed that a majority of the board members leaned to considering larger rate cuts. "In view of the progress on disinflation, larger downward adjustments could be considered in some meetings, albeit maintaining a restrictive stance," the minutes said. The Mexican peso, which suffered from overall USD strength in the second half of last year, remains in the defensive. At USD/MXN, the local currency holds within reach of the weakest levels since mid-2022 reached at the end of last year.

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