Yields volatility apparently remains low enough not to derail a constructive risk sentiment

Markets

Except for the (strong) US services ISM on Monday last week’s eco calendar was light. Friday’s US CPI revision in this respect didn’t change the picture. US auctions (3-y, 10-Y, 30-y) all met solid investor demand. Even so, yields on both sides of the Atlantic are setting/near new YTD peak levels, testing important technical resistance. The US 2-y yield nears the 4.50% area. The 10-y is closing in on 4.20%/4.25% (38% retracement October/December decline). Despite a weak cyclical picture in Europe, EMU yields also are testing comparable upside levels (EMU 2-y swap 3.07%/3.15%; EMU 10-y swap 2.75%/2.77%). Central bankers advocated a cautious wait-and-see bias, pushing back against a too aggressive start of the easing cycle. Still they were not specific on the timing of the inaugural rate cut, leaving the market room for interpretation. Upcoming data now will decide to which side of the above-mentioned levels the interest rate domino’s will fall. In a daily perspective on Friday, US yields added 2 bps across the curve. The German yield curve inverted further with the 2-y adding 5.6 bps and the 30-y closing unchanged. Yields volatility apparently remains low enough not to derail a constructive risk sentiment. The S&P (+0.57%) again touched an all-time record. The Nasdaq also continues to perform strongly (+1.25%). A mild risk sentiment and maybe some ‘support’ from the short-term interest rate differential helped EUR/USD drifting higher in the 1.08 big figure (close 1.0784). The rise in USD/JPY stalled as the psychological 150-level came on the radar (close 149.29).

This morning, many Asian markets are closed for the Lunar New Year holiday. In an interview, ECB governing Council member de Cos said that the ECB March projections will be key to assessing first whether the ECB can be sufficiently confident that to 2.0% target can be achieved and, second, the rath path that is compatible with reaching the target. Of course, this doesn’t provide concrete guidance on the specific timing of a first rate cut. Today, we keep an eye at the NY Fed 1-y inflation expectations. There are again plenty of CB speakers (ECB’s de Cos & Lane, Fed Barkin and Kashkari and BoE governor Bailey) but we doubt the will bring market-moving stories. From tomorrow on the data again can fully play their role, with the US January CPI. On Thursday the US Empire manufacturing, the Philly Fed business outlook and retail sales will give some insight on the resilience of the US economy. We will also get an extenso update on the US economy with labour data (Tue), inflation (Wed), and production/GDP (Thu) and finally retail sales on Friday. More signs of resilience of the UK economy might push EUR/GBP to go for a challenge of the 0.8493 key support.

News and views

EU officials from the Commission, Parliament and Council late yesterday reached an agreement on the new fiscal framework. They replace the strict 3% (deficit) – 60% (debt-to-GDP) rules that have been suspended ever since the pandemic. The reformed pact is a less tight one allowing for debt reduction over a period of four to seven years. Frugal states including Germany, however, called for annual targets for cutting public debt and limits for public spending while the likes of Italy and France sought some exemptions to create enough room for public investments in the greening sector, defense and technology. The compromise that was found means that Spain would probably have to do the most extra fiscal tightening, i.e. reducing its structural primary deficit by the maximum of an additional 1% point of GDP. Germany, facing harsh spending limits following the constitutional court ruling last year, would not be impacted by the new rules.

Germany’s ruling coalition suffered losses in yesterday’s partial repeat in Berlin of the 2021 federal election. The repeat was ordered by the constitutional court end last year over voting irregularities amid long queues, result announcements while polling stations were still open and the Berlin marathon hampering the access in and around the city. While the defeat does not change the balance of power in the lower house of parliament, it is a sign of the time with Scholz’s government rating plummeting to record lows in recent months. Benefiting from this are the main opposition party CDU/CSU and the far-right AfD. This year’s June European Parliament elections and three important regional ballots in September in easter Germany could spell similar trouble for the traffic light coalition. The next general election in Germany is due in the fall of 2025.

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