Markets
Trading was subdued today during European hours. Core bonds slightly built on the momentum generated the past sessions as US wage inflation (last Friday), US CPI inflation (Tuesday) and PPI numbers (yesterday) didn’t deliver the feared overshoot. US Treasuries started underperforming after the early US eco data releases. US December retail sales were stronger than expected after a poor November month. Holiday-shopping contributed positively. Gains were broad-based with 12 out of 13 categories posting an advance. Sales in the retail control group, which excludes food services, car dealers, building-materials stores and gasoline stations increased 0.5% m/m (vs 0.4% m/m expected). It is often regarded as a proxy for consumption in US GDP. Nevertheless, given a negative overhang from Q3 and following poor October & November months, control-retail sales might have decreased by 0.3% Q/Q annualized in the final quarter of 2019. US weekly jobless claims approached multidecade lows again, declining from 214k to 204k (vs 218k expected). The January Philly Fed Business Outlook posted the third positive surprise, rising from an upwardly revised 2.4 to 17 (vs 3.8 expected), the highest level since May 2019. Importantly, details showed increases in important subcategories like new orders, shipments and employment. The forward looking expectations (six months from now) even rose to its highest level since May 2018. Early signs that the Phase 1 US-Sino trade deal could unfreeze business? The losses in US Treasuries remain modest. US yields add 1 to 1.5 bps across the curve. German yields mirror those moves, losing some bps. The same story is true for EUR/USD. Yesterday’s upleg initially continued, reaching 1.1173. US eco data put a halt to this move, bringing the pair back to 1.1150. USD/JPY is changing hands just north of 110.
UK (rate) markets found some breathing space following this week’s dovish repositioning. Soft comments from several heavyweight BoE members and a poor inflation reading lift January rate cut bets. Sterling losses were contained vis-à-vis moves on bond markets. EUR/GBP 0.8598 resistance held and the pair returned to the 0.8550 area, where it was stuck for most of today as well.
News Headlines
The Turkish central bank cut policy rates for a fifth time straight as the one-week repo rate was as expected slashed from 12% to 11.25%. With inflation at 11.8% in December, the latest cut introduced negative real rates for the first time since October 2018. The inflation report, due on January 30, will provide more details about the future monetary policy path. The Turkish lira advanced (EUR/TRY 6.54).
South Africa’s central bank (SARB) unanimously decided to also cut rates with 25bps to 6.25%. The move came as a surprise. Projected growth for 2020 has been revised lower to 1.2% (vs. 1.4%) and is set at 1.6% for 2021. Inflation is expected at 4.7% this year and 4.6% in the next. The SARB said the Rand has profited from improved global sentiment but it is wary of domestic shocks to the country’s currency. USD/ZAR (14.38) gains following the decision were only short-lived.
The ECB minutes of its December policy meeting revealed some optimism amongst the governing council members, stipulating that the industry slowdown may have bottomed out before spilling over to the services sector. The GC also sees a solid upward trend in underlying inflation when excluded for volatile holiday costs. Some members expressed concerns about the efficacy of policy measures, suggesting policy could/should be adjusted (in time) to limit the negative side effects.
