The US yield curve flattens with longer-term bond yields undoing their post-Fed move

Markets

We retain from the day after the hawkish FOMC meeting that the greenback pushed towards fresh recovery highs. The trade-weighted DXY crossed above 96.94 to close at 97.26. Next important resistance stands at 97.72 which is 62% retracement on the 2020 dollar slide. EUR/USD fell below 1.1186 to close at 1.1145. Next support in this pair comes in at 1.1040 which is already 76% retracement on the 2020 EUR/USD-rally. The US yield curve flattened yesterday with longer-term bond yields undoing their post-Fed move. The main intraday move occurred after a decent WS opening. US Treasuries eventually did manage to hold on to those intraday gains, even if sentiment on Wall Street soured again later on. Main US indices lost up to 1.4% for Nasdaq. Daily changes on the US yield curve ranged between +3.7 bps (2-yr) and -7.3 bps (30-yr). The German yield curve flattened as well with the front end of the curve adding up to 3.7 bps (4-yr) and the very long end 1.8 bps (30-yr) lower. European investors concluded after the hawkish Fed signal that also the ECB over the course of the coming months will have to make a U-turn with regard to its inflation views and its very accommodative monetary policy. We believe that risks are building for an accelerated taper announcement later this year with aim of freeing space to kickstart an upward rate cycle before the end of 2022.

Most Asian stock markets eke out some gains this morning, as do US equity futures. Nasdaq futures outperform following strong Q4 apple earnings. Today’s stock market session could be important to guide short term risk sentiment. US stock markets didn’t revisit the pre-Fed sell-off lows yet even though sentiment remained extremely shaky on Wednesday and yesterday. A decent session today might be seen as constructive for the next sessions. Short term geopolitical developments suggest to err on the side of caution ahead of the weekend. Longer term, we remain skeptical towards risky assets as well given surging (US) real yields. Today’s eco calendar contains January EC confidence data and US PCE deflators. Consensus expects both headline and core deflators to rise slightly further, to 5.8% Y/Y and 4.8% Y/Y respectively. We don’t expect the numbers to influence trading after this week’s signal from the Fed. There’s no reason to question ruling market trends.

News headlines

In its quarterly inflation report, the Central Bank of Turkey (CBRT) forecasts inflation to decline to 23.2% (11.8% in October) at the end of this year after it will reach peaks near 50%/55% the first half of the year. The CBRT projects inflation easing further to 8.2% end 2023 an return to the 5.0% target in 2024. The CBRT sees an increased use of the lira in the financial system and the economy as key to address higher inflation and will continue to support measures encouraging domestic investors to convert foreign currency to lira. CBRT governor Kavcioglu repeated that the decline of the lira didn’t have anything to do the with the CBRT cutting the interest rate 500 bps to 14% last year. Turkey’s December headline inflation was 36.03% Y/Y. The January figure will be published Thursday next week. The lira yesterday lost modest ground to close near USD/TRY 13.61.

The Reserve Bank of South Africa raised its policy rate by 0.25 ppt to 4.0%, after a first rate hike in November. Headline CPI in South Africa accelerated to 5.9% Y/Y in December. Despite upside risks to inflation, the SARB believes a gradual rise in the repo rate will be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates. The central bank sees inflation at an average 4.9% this year and it expects it to return close to the 4.5% mid-point at the end of the policy horizon in 2024. At that time the SARB indicates the policy rate could be 6.5%, (downwardly revised from 6.75% guidance in November). Economic growth is expected to slow down from an estimated 4.8% in 2021 to 1.7% and 1.8% in 2022 and 2023 respectively. The rand was well bid going in the SARB policy decision, but dropped after the announcement to close at USD/ZAR 15.46.

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