US equity indices and some European ones set new all highs yesterday. Investors hoped that the coronavirus was getting under control, and probably even more, that central bankers will keep ample monetary conditions in place to counterbalance any potential damage on the economy. An unexpected sharp fall in EMU Dec production (-4.1% Y/Y) raised questions on the strength of the EMU economy already before the corona virus. German Bunds outperformed US Treasuries. German yields rose marginally, up to 1.3 bp (10-y). The rise in US yields was a bit bigger with yields rising between 2 bp (2-y) and 3.25 bp (10-y). In his appearance before the Senate, Powell reiterated that the Fed probably will have to use ‘alternative’ options including QE and forward guidance in case of an economic downturn as ‘low rates are not really a choice anymore, they are a fact of reality’. The 10-y Treasury auction ($ 27 bln) received solid investor demand (bid-to cover 2.58). On the FX market, the euro downtrend continued unabatedly. After a pause early in the session, the EUR/USD cross rate finally took the way south again and dropped below the 1.0879 2019 low, reaching the lowest level since May 2017. EUR/CHF also dropped set a new low correction below 1.0650.

This morning, Asian equities show a hesitant trading pattern, mostly with modest losses. China reported a sharp rise in new corona cases due to a change in the counting methodology. Still, it raised questions on the spreading of the virus causing a mild profit taking on the recent risk rally. US Treasury yields are declining 3-5 bps. The yuan eases (USD/CNY 6.9840 area). The yen strengths with USD/JPY returning below 110 (109.80 area). For now the ‘reversal’ in risk sentiment also doesn’t help the euro. EUR/USD (1.0875 area) hovers within reach of recent lows.

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Later today, European Commission will publish its winter forecasts. A downbeat assessment can revive speculation that the ECB still might be ‘forced’ to consider further erasing, even as we think that the bar for such a move is high. In the US, January CPI is expected to rise a trend-like 0.2% M/M resulting in a core CPI of 2.2% and headline CPI of 2.4%. The latter would be the highest level since October 2018. We don’t have strong arguments to take a different view from the consensus. We have to impression that markets aren’t that worried about the rise in CPI inflation as long as the core PCE deflators, the Fed’s preferred measures, stay substantially lower.

The risk-off correction this morning and market speculation on prolonged central bank softness might create a bond-friendly environment. Both the 10-y US yield’s and the Bund’s recent correction low levels at 1.50% and -0.44% might again come on the radar. For now we don’t expect a break, but there are no signs that core yields are preparing a convincing comeback soon. EUR/USD struggles to prevent further losses. An easing in US yields could slow further USD gains, but we doubt it will change fortunes for EUR/USD. In the UK, PM Johnson is expected to reshape its government. EUR/GBP is moving to the bottom of recent trading range, but this is probably mainly euro softness.

News Headlines

RBA governor Philip Lowe warned of profound economic and financial impacts from climate change and pointed out the coronavirus is having a major effect on the Australian economy in the short term. The central bank is stepping up efforts to gain a better view on the economic implications of climate change. Lowe also added the RBA is not “obsessed” with getting inflation back to its 2%-3% medium target range in a hurry, signaling a wait-and-see bias.

USTR Rober Lighthizer is puzzling over a plan to reset US commitments at the WTO by threatening to pushing up the long-standing ceiling on tariffs, Bloomberg reported. The US aims to trigger a renegotiation of relationships with fellow WTO members as its main trading partners can charge higher rates than the US does.


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