Markets
US Treasuries underperformed yesterday with the curve bear flattening. Daily changes ranged between +3 bps (3-yr) and +1.7 bps (30-yr). The US 2-yr yield gets again more breathing room above key 3.4%-support with the 10-yr yield limping away from the psychological 4% area as well. A solid batch of eco data added to the feeling that the Fed stays put in March. December durable goods orders beat the mark on every level, including for the crucial core gauge which serves as a proxy for investments in GDP calculations (+0.9% M/M). Tomorrow we’ll find out when the Bureau of Economic Analysis reports Q4 GDP numbers. Housing data and January industrial production (+0.7% M/M) numbers equally beat consensus. During US trading hours, Minutes of the January FOMC meeting revealed that the vast majority of participants judged that downside risks to employment had moderated in recent months while the risk of more persistent inflation remained. Several participants cautioned that easing policy further in the context of elevated inflation readings could be misinterpreted as implying diminished policymaker commitment to the 2% inflation objective. In an hawkish shift, several would’ve supported two-sided language on the rate path putting the door open for a rate hike if necessary. The data/Minutes-combo helped the dollar out. The trade-weighted greenback (DXY) had its second best day YtD, rising from 97.14 to 97.74. From a technical point of view, the move lacked significance with first minor resistance at 97.99. EUR/USD fell from 1.1855 to 1.1783 with first minor support looming at 1.1766. GBP/USD already closed just below that first technical reference (1.3509) with GBP-weakness this week also at play (following labour market and to a lesser extent CPI numbers). EUR/GBP simultaneously bumps into EUR/GBP 0.8746 resistance with the UK currency at risk of technical follow-up losses in case those levels give away. It’s our preferred scenario with UK markets preparing for a March BoE rate cut.
Oil prices grabbed a lot of attention as well with Brent crude preparing a break-out above the $70/b area. Prices jumped by the most since October yesterday after Axios reported that a major war in the Middle East could begin very soon. US officials said that Iran needs to come back with a detailed proposal in two weeks after this week’s Geneva talks. Last summer, the White House set a two-week window to decide between further talks or strikes. Three days later, he launched Operation Midnight Hammer, attacking three nuclear facilities in Iran. The developing narrative is one to look out for today, especially as it doesn’t seem to interfere with a broader risk rebound. Key European indices gained over 1% yesterday with US benchmarks ending 0.25% (Dow) to 0.75% (Nasdaq) higher. The US eco calendar contains trade data, Philly Fed Business Outlook and weekly claims. In Europe, consumer confidence is due. We expect them to play second fiddle today.
News & Views
• Australian January employment grew by 17.8k. That was slightly below the 20k expected but came after an upwardly revised 68.5k in December. Full-time employment rose by 50k, partly offset by a fall of 33k in part-time employment. Strong labour demand was even more visible in the rise in hours worked by 0.56% in January, following an already strong increase in December (0.4%). The unemployment rate stabilized at 4.1%, defying expectations for an uptick to 4.2%. With the central bank’s Q1 forecast at 4.3%, it means downward revisions in the next projections are likely. Labour market participation is at a solid 66.7%. The numbers vindicate the Reserve Bank of Australia, which raised the policy rate earlier this month amid concerns for capacity constraints keeping inflation above target. A tight labour market – the RBA estimates the equilibrium unemployment rate at 4.6% – isn’t going to ease those. Australian swap yields rally 4.4-7.8 bps with front end underperformance revealing increasing rate hike bets. Market implied probabilities for May rise to 87%, for June to 97%. AUD/USD ekes out gains to 0.705.
The IMF in a report yesterday said China’s industrial policies create international spillovers and pressures through overcapacity and have combined with weak domestic demand made Chinese economic growth more reliant on manufacturing exports. It repeated its call to move to a consumption-led model while urging the country to slash state support for the industrial sector. The IMF estimates that China spends around 4% of GDP subsidizing companies in critical sectors and recommended to cut that in half in the medium term. China’s global trade surplus last year for the first time ever surpassed the $1tn mark, with export flows having rerouted from the US (-20%) to Africa (+26%), South-East Asia (+13%) and the EU (+8%).
