The dollar is still the odd one out in this story

Markets

December FOMC Minutes still echoed through dealing rooms yesterday. Markets concluded that the US central bank could be on its way for a March rate hike with intentions to start winding down the $8.8tn balance sheet later this year. Voting regional Fed governor Bullard backed this scenario as did non-voting San Francisco Fed governor Daly. The latter emphasized strength on the US labour market as witnessed for example earlier this week in a very strong December ADP employment report. Today’ payrolls are expected to confirm this. Consensus expects a decent net job creation of 447k with the unemployment rate forecast to decline from 4.2% to 4.1%, which would be the lowest since February 2020 (3.5%). Average hourly earnings are forecast to remain robust at 0.4% M/M and 4.1% Y/Y. The key question is whether the data will still be able to influence main markets further following a volatile start (excl. FX) to the year. US yields already added 13.3 bps (2-yr) to 22.1 bps (7-yr) on those first four trading days with the US 10-yr yield for example approaching the 2021 high at 1.77%. Real yields are driving the move higher. In such a context it will probably take an extremely strong report to extend this week’s US Treasuries’ losses. US stock markets took a scare from this rate move with the Nasdaq for example down 3.6% YTD. The dollar is still the odd one out in this story, sticking near the beloved 1.13 big figure against the euro. Rising real rates and the risk-off environment tend to cancel each other out for the moment in this cross rate, but the greenback can’t really profit against the smaller currencies either. With the Fed’s cards out on the table, investors might be more interested in today’s EMU inflation numbers. Consensus expects the December print at 4.8% Y/Y, slightly down from 4.9% Y/Y in November, but we expect the first 5%(+?) reading in EMU history. Similar experiences in the US tended to spark sell-off in both bonds and stocks in such scenario. The same reasoning applies as for US Treasuries though. European bonds have been selling off ever since the December ECB meeting. The German 10-yr yield closes in on the -0.03% recovery high, while the EU 10y swap rate already passed its own technical reference (0.33%). The next mark to watch here is 0.4% which is 50% retracement on the 2018-2019 decline. Summarizing for today: EMU and US eco data will probably be negative for core bonds (and currently risk sentiment), but turn a little bit more cautious on the pace of the decline given strong moves since mid-December. EUR/USD remains deadlocked.

News headlines

Monetary policy normalization/tightening also continues in South America. Peru raised its policy rate by 50 bps to 3.0%. It was the sixth consecutive monthly rate hike since the cycle started in in August (from 0.25%). Inflation in Peru rose to 6.4% Y/Y in December. The central bank has an inflation target of 2.0% with a tolerance band of +/- 1.0%. Given solid economic growth, the bank no longer sees a need for an expansionary monetary policy stance. With the incoming information available, it now considers its ‘appropriate to continue with the normalization of monetary policy ion the coming months’. At the same time, the inflation problem in Argentina remains of a much different degree. The centrale bank yesterday raised its ‘leliq’ policy rate from 38% to 40% after it was left unchanged for more than a year. Inflation in Argentina is hovering around 50%. The IMF, in negotiations of a new schedule for the countries repayments to the Fund, asked Argentina to raise interest rates above the inflation rate.

Japanese eco data published this morning showed a mixed picture. The December Tokyo headline CPI, which is published well ahead of the national release, is gradually trading higher from 0.5% to 0.8%. The ‘core measure’ excluding fresh food also rose from 0.3% to 0.5%. At the same time, November spending data raised questions on any sustained reflationary dynamics. Even before the impact of the omicron variant hit activity, household spending unexpectedly declined 1.2% M/M in November. The spending was also 1.3% below the level recorded last year. Real cash earnings printed unchanged in November (0.0% Y/Y). Higher domestic spending supported by higher wages and an accommodative fiscal policy is an import component of the recovery strategy from the new government.

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