Thu, Jan 20, 2022 @ 07:54 GMT
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Middle East Tensions Ease Further

Market movers today

In the UK we have the monthly GDP estimate for November, which will be decisive for whether the BoE will cut the policy rate later this month, which is our base case.

We think this may lead to further GBP weakness, as it is not yet priced in.

Otherwise this week we are looking very much forward to the official signing of the US-China phase-1 trade deal on Wednesday.

In terms of economic data releases, we have some highlights worth mentioning: Swedish CPI inflation and US retail sales on Wednesday, ECB minutes on Thursday and US industrial production and Chinese economic indicators for retail sales, investments and Q4 GDP on Friday

Selected market news

The main event on Friday was the US labour market report for December. Non-farm payrolls came out at 145,000 persons compared to the 166,000 consensus estimate. The November figure was revised lower by 10,000 to 256,000 persons. Overall a weak report relative to market expectations. However, job growth remains above labour supply growth. Hence, it was still strong enough for the labour market to continue to tighten.

The unemployment rate was unchanged at 3.5% but noteworthy ‘underemployment’ fell from 6.9% to 6.7%. We see this measure as a better slack gauge than the actual unemployment rate. Finally, wage growth came in weaker in December at 0.1% m/m and the annual growth rate eased from 3.1% to 2.9%. It seems that wage growth has peaked.

Last week there was a lot of focus on the conflict between Iran and the US. However, the ‘modest’ Iranian response to the killing of Suleimani and even some more conciliatory comments from Trump have taken the US-Iran conflict more or less away from the financial agenda. It seems that Iranian protesters – as was the case before the killing – are now once against turning their anger against the Iranian leadership after it has admitted that the military shot down the Ukrainian aircraft by mistake. The oil price is now USD65 a barrel (Brent), which is below the level before the killing of Suleimani.

The weaker labour market report pushed US treasury yields lower by 3bp to 1.82%. Noteworthy the curve flattened as the market has a hard time pricing in new rate cuts from the Fed at the next couple of meetings despite the slightly weaker report. The market is saying that the Fed is firmly on hold for now. Otherwise, focus is on the wave of bond issuance in Europe. We have seen a solid performance in the syndicated deals from last week. Portugal and Ireland performed some 4-5bp versus swaps, while Slovenia performed more than 10bp relative to swaps. The new issuance season continues this week with EFSF and possibly Belgium and Spain in the market.

US equities ended Friday with marginal losses, but Asian markets are mainly in green this morning.

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