Markets
Some more disappointing data came yesterday on the heels of last week’s sub-par set of labour market data. US retail sales failed to grow at the end of last year, missing expectations for a solid 0.4% expansion. The Q4 Employment Cost Index meanwhile rose at the slowest pace since 2021. It may ease some of the remaining concerns at the Fed about upside inflation risks. US yields dropped between 3.3 and 7.4 bps in a market that was already on high alert going into the delayed payrolls (and annual 2025 revision) release today ever since Fed Waller’s “Zero. Zip. Nada.” speech flagged the risk of basically no employment growth throughout last year. Long end outperformance pushed the likes of the 10-yr yield below 4.2% support to the YtD lows. German yields dropped 0.9-3.7 bps in sympathy. Corporate bond markets were all about Alphabet’s massive (AI) financing spree in which a 10-times oversubscribed sterling centennial obviously drew the biggest attention. JPY stood out in FX markets, rallying against all major peers on continued hopes for a Japanese revival under PM Takaichi and her supermajority. JGBs by the way also gave the government the benefit of the doubt from a fiscal perspective by dropping 6-8 bps at the long end of the curve. USD/JPY closed near the intraday lows just north of 153. EUR/JPY neared the January troughs around 182. EUR/USD stabilized near 1.19, EUR/GBP bounced back above 0.87 with sterling’s grace period following PM Starmer’s survival apparently already ending.
Japan’s yen is extending this week’s rebound today but we should add that it happens in thinned trading with Japanese markets closed for National Foundation Day. The US dollar remains in the defensive while Treasuries (in the futures market) are rising going into what possibly are going to be pivotal payrolls. The January edition is combined with the annual revision of last year. The risk for 2025 is that the +/- 600k cumulative job growth is going to be wiped out and more: expectations are for a -825k downward adjustment. This is where Fed Waller and his repeated calls for rate cuts to support a weakening labour market come into play. The bar for January is set at a 65k job growth with unemployment stabilizing at 4.4%. There are nuances to today’s numbers, such as seasonal effects, deportation efforts (leading to lower employment but with less impact on the unemployment rate as the supply pool shrinks) and productivity growth (leading to GDP expansion despite fewer or even no hirings). But we doubt these will be given any consideration in the current circumstances. We see asymmetric market risks with the bigger reaction – a weaker dollar, front-end curve outperformance and potentially weaker stocks – in case of a downside surprise. Belgium takes center stage in European politics with the European Industry Summit today ahead of tomorrow’s informal summit to boost European competitiveness.
News and views
China’s January price data published this morning confirmed the deflationary tendencies. Consumer price inflation was reported that 0.2% M/M, reducing the Y/Y measure from 0.8% in December to 0.2%. Both goods price (0.3% Y/Y from 1%) and services inflation (0.1% Y/Y from 0.6%) eased, suggesting absence of demand pressures. Core inflation slowed to 0.8% Y/Y from 1.2%. Producer prices turned slightly less negative in a yearly perspective, ‘rising’ from -1.9% Y/Y to -1.4% Y/Y, the ‘highest’ level since July 2024. Prices of producer goods to some extent have improved due to higher raw materials costs. However, prices of consumer goods leaving the factory gate declined further (-1.7% Y/Y from -1.3%). The yuan this morning maintains its recent gains. At USD/CNY 6.91, the yuan trades near the strongest levels against the US dollar since May 2023.
Deputy Governor of the Reserve Bank of Australia, Andrew Hauser, warned that too high inflation remains a challenge for the monetary policy committee. Hauser assessed that the some of the recent rebound in inflation ‘reflects growing underling pressure about a pick-up in demand against supply constraints in the economy’. The risk is for higher inflation to persist, a scenario the RBA can’t allow to occur. The RBA last week raised its policy rate by 25 bps to 3.85% after (trimmed mean) core inflation rose further north of the 2-3% inflation target. Markets see an 80% chance for a rate hike in May. The Aussie dollar extended gains after the comments, with AUD/USD jumping north of 0.71, nearing the early 2023 top.
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