Yesterday’s technical equity correction already entered calmer waters today. Economic data was limited to a disappointing but unnoticed US NFIB Small Business Optimism (declined from 101.4 to 95.9 vs. 100.2 expected). European stocks opened in the green but gradually turned marginally negative in most areas as a subdued trading session evolved. Wall Street kicks off with slight gains. Defying the slight risk-off on equity markets, core bond yields extended their recent rise, supported also by higher oil prices. US yields advance 1.3 bps (5-yr) to 1.6 bps (10-yr) with both real yields and inflation expectations carrying rates higher. The US 10-yr yield confirms yesterday’s escape from the upward sloping trend channel to the topside. The German yield curve bear steepens with yields higher (up to 1.5 bps at the long end of the curve). Peripheral spreads widen with Italy (+7 bps) underperforming amid lingering political uncertainty. The Italian junior coalition party Italia Viva threatens to withdraw support and strip the government of a working majority in protest of various issues, including PM Conte’s plans to spend the European funds. The government is holding a long-delayed cabinet meeting as we write. Belgium successfully launched a new 10y benchmark bond (Oct 22, 2031), raising 6bn from books that totaled above 50bn at midswap-7 (guidance: MS-5).
Along with the easing in risk-off, the recent dollar recovery shifted into lower gear as well. The trade-weighted DXY stabilized near yesterday’s closing around 90.5. EUR/USD displays a similar picture in the 1.214/5 area. USD/JPY is treading water north of 104. Bank of England governor Bailey gave a rather downbeat speech today, saying things will probably get worse before getting better. The economy will rebound, he said, but only after the lockdown had ended and the spread of the virus has receded. About negative policy rates, Bailey said last week it is important that they are part of the toolkit, a comment echoed by MPC member Tenreyro on Monday. In today’s speech however, the BoE governor took a more guarded approach. He still sees a lot of issues with negative rates, one of them being that it could hurt bank’s profitability and eventually curtail lending instead of the hoped-for boost. BoE Deputy Governor Broadbent later also voiced caution. He said that IF the central bank would lower rates further, it would want them to feed through in lending rates but “experience from other countries tells us that retail interest rates are kind of bound at zero”. Investors scaled back their negative rates bets in the wake of these two speeches, making sterling the G10 top performer. EUR/GBP fell further below 0.90 towards 0.894 currently. Cable is testing the 1.36 big figure, up from 1.35.
Inflation in Brazil rose at a faster-than-expected 1.35% M/M and 4.35%Y/Y in December, from 4.3% Y/Y the previous month, as such surpassing the 4% end of year target of the central bank. Inflation more than doubled from a record low below 2.0% in May. Price in the food and drink category were up 14.1% in the year and accounted for more than half the rise in annual inflation. The central bank considers the recent rise in inflation as temporary due to a jump in food and commodity prices. The 2021 and 2022 inflation targets are set at 3.75% and 3.50% respectively.
Inflation in India went the opposite way compared to Brazil. December annual retail inflation eased from 6.93% to 4.59% and returned within the 2%-6% target range of the Reserve Bank of India. The decline was substantially bigger than expected. Retail food price inflation (about 50% of the inflation basket) eased from 9.43% to 3.41% Y/Y. The RBI meets on February 5. It cut the repurchase rate from 5.15% to 4% last year. The RBI wants to support economy which is estimated to contract by 7.7% in fiscal year ending March. The Indian rupee touched an all-time low against the dollar in April (USD/INR 76.91) but reversed about half of the post-corona sell-off (USD/INR currently at 73.25).