Greenback depreciation kicked in after reports from Chinese regulators

Markets

Keir Starmer lives to fight another day. The embattled UK prime minister drew support from several key ministers yesterday and said he would not step away. Starmer resigning in the very short term, and thereby paving the way for a successor with unknown fiscal credentials, became less likely. Speculation rose to a high when the Scottish Labour leader Anas Sarwar called for Starmer’s exit. But calm returned in the pound and gilts after health secretary Wes Streeting said this was not necessary. Streeting has long been considered a contender for the Labour leadership. His name also emerged as the linchpin in late last year’s leadership plot. Long-term gilt yields pared gains (risk premia) of more than 9 bps to no more than 1.5 bps. EUR/GBP backed away from intraday highs around 0.874 to finish just shy of the 0.87 big figure. GBP/USD jumped to 1.37 from 1.36 with general dollar weakness helping the move higher. Greenback depreciation kicked in after reports from Chinese regulators instructing banks to trim US Treasury exposure, even though the officials made clear it had nothing to do with (geo)politics or a fundamental confidence loss. The director of the US National Economic Council Kevin Hassett extended the downleg by warning for slightly smaller jobs numbers in Wednesday’s delayed payrolls report. Him adding that this is consistent with higher GDP growth due to a productivity increase got lost in the market. DXY slid to sub 97 & EUR/USD rose beyond 1.19. USD/JPY fell from as high as 157.76 to 155.88 with markets taking the landslide victory of PM Takaichi’s LDP in snap elections well. Core bonds traded with a minor positive bias. The US curve bull steepened with net daily changes varying between -1.2 bps (2-yr) to +0.7 bps (30-yr). German Bunds marginally underperformed. Stock markets in the US and Europe started the week in good spirits.

Some of yesterday’s storylines are still setting the tone for Asian dealings today. Japanese long term bonds surge, pushing yields at the 30-yr and 40-yr tenor 6-8 bps lower. It follows a speech from Takaichi after Japanese closing hours yesterday in which she sought to ease fiscal concerns. The yen’s rebound stretches into a second day. USD/JPY further unwinds the pre-election rally by dropping to 155.37. We’re also seeing some more fall-out from the Chinese report on the USD/CNY cross rate. At 6.91 the pair is trading at the weakest level since April 2023. We remain cautious on the dollar today. Last week’s US economic data exposed vulnerability. Today’s batch (ADP, retail sales) is unlikely to change that going into the payrolls and with Fed’s Waller and Hassett’s comments in mind. The front-end of the US curve may outperform.

News and views

Earnings, job loss and job finding expectations improved modestly in the New York Fed’s January consumer expectations survey. Inflation expectations are easing short-term, while holding unchanged at medium- and longer-term horizons. For the one-year ahead inflation expectations declined 0.3 ppts to 3.1%. They remained stay at 3% for the three and five-year horizon. Median one-year-ahead earnings growth expectations increased 0.2% to 2.7%, driven by those with a household income under $50.000. The mean perceived probability of losing one’s job in the year ahead decreased 0.4% to 14.8%,but stays slightly above the trailing average. The perceived probability of finding a job in the next three months if one’s current job was lost, rose by 2.5 ppts to 45.6%, but also remained below the trailing 12-month average (48.6%). Perceptions about households’ current financial situations and expectations about households’ financial situations deteriorated, with a smaller share expecting to be better off a year from now and a larger share expecting to be worse off.

 January retail sales data as published by the British Retail Consortium (BRC) showed an improvement in sales momentum at the start of the year. Total retail sales were up 2.7% Y/Y improving from a (disappointing) December performance (1.2%). The January figure was also a above the 12 month average (2.3%). Food sales improved from 3.1% to 3.8%, returning to the 12 month average. Non-Food sales gained 1.7% Y/Y from a 0.3% Y/Y decline in December. Same store sales also improved from 1.0% Y/Y to 2.3%, the best reading since August of last year.

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