Yields decline despite central bank tightening

Market movers today

Rounding off an eventful week, the main event today will be the US January jobs report. Consensus is looking for a moderation in the non-farm payrolls growth, yet the recent data releases have been mixed. The ADP private sector employment growth was weaker than expected, but the JOLTs data and the Conference Board's consumer survey surprisingly pointed towards improving labour market conditions.

The ISM Services Index is also due for release from the US, consensus is looking for a modest uptick in line with the PMI and following the sharp weakening in December.

The December euro area Producer Price Index will also be released today, consensus is looking for another modest decline in m/m terms.

The 60 second overview

It was again a dramatic day in the financial markets with a significant decline in interest rates and bond yields despite the tightening of monetary policy from both ECB and BoE. The markets took the ECB's communication as a sign that the ECB is close to ending its hiking cycle, as bond yields rallied strongly. This is too some extent similar to what happened after the FOMC market on Wednesday. We judge that yesterday's communication reflects a very split governing council. We still expect the ECB to hike its policy rates by 50bp in March and 25bp in May.

Hence, the markets are much more focused on the continued decline in headline inflation (rather than core-inflation) and that central banks are getting closer to the peak even though central banks have stressed the need to do more in terms of tightening. However, the potential rate hikes are no longer coming as a surprise as we are getting close to the end of the hiking cycle.

The focus now shifts to the US labour market report, which is expected to show a slowdown as the consensus forecast for the non-farm payrolls for January is 189,000, down from 223,000 in December. The unemployment rate is seen rising to 3.6% from 3.5%.

The impact from the central bank meetings on equities and FX markets was much less dramatic with a modest rise in equity markets as well as small changes in EUR/USD and USD/JPY.

FI: The European fixed income markets rallied on the back of both the BoE and ECB meetings despite the tightening of monetary policy. However, the big surprise was the comment from ECB's Lagarde that they intend to hike by 50bp in March rather than communicating clearly that 50bp in March was a necessary condition to get inflation down.

FX: As repricing of central banks is back in the drivers' seat for G10 FX crosses it was coherent to see USD trading weaker after the Fed and then EUR moving lower vs peers like USD, SEK, GBP and JPY after the ECB, even as risk appetite soared. EUR/USD dropped one figure and ended the day at 1.09. EUR/SEK briefly back below 11.30 after ECB. GBP erased some of its losses during the evening and EUR/GBP is close to where it was before BOE.

Credit:  Credit markets rallied yesterday on the back of the guidance provided at the ECB meeting, which was perceived as dovish. As a result, iTraxx Main was tighter by 6bp to 73bp while Xover tightened 27bp to 381bp. Separate from this, the QT modalities released later in the day suggest that ECB will be stepping up its efforts to 'green' its corporate bond holdings through a stronger tilt of reinvestments towards issuers with better climate performance. This is due to take place from 1 March 2023. Also, ECB primary market purchases are to be phased out from this date for the private sector programmes, with the exception of corporate bonds placed by issuers with better climate performance and corporate green bonds. As all eyes were on the ECB meeting, no new issuance took place in euros.