Markets
Today’s main trading event already occurred during Asian dealings, when a CNN report revealed soon-to-be US Biden could announce a new stimulus plan totaling $2000 billion. The news propelled US bond yields several basis points higher, thus ending the bull flattening of the yield curve after this week’s supply showed still strong investor demand. Price action afterwards developed in a narrow sideways trading range in the run-up to the US weekly jobless claims. The timely labour market indicator showed a strong increase in unemployment claims from 787 000 to 965 000, the highest figure since August. Markets expected more or less a stabilization. The number follows a disappointing payrolls report last week and suggests the US labour market remains in a very fragile place as (services) companies were forced to shut their doors again amid a relentless flare-up of the coronavirus. Initial claims for the Pandemic Unemployment Assistance, a program designed for unemployed people that are not eligible for state jobless aid (eg. the self-employed) also surged from 161.2k to 284.5k. Continuing claims unexpectedly rose as well, from 5072k to 5271k, the first increase since end November. US core bond yields pared some of the earlier gains to trade 1.3 bps higher at the long end of the curve. The German Bund outperformed, supported by the ECB minutes suggesting the PEPP buying could be altered to prevent financial conditions from tightening. The yield curve continued its bull flattening with yields down 2.2 bps (2-yr) to 3.5 bps (30-yr). Peripheral spreads widen. Italy (+9 bps) underperforms after Italia Viva leader Renzi stripped the government of its majority in parliament, plunging the country in political uncertainty.
The dollar traded near yesterday’s close for most of the European session, failing to really profit from an admittedly modest early US yield rise. It took the ECB minutes (which also did not rule out another rate cut if necessary), the first US investors and a (minor) technical break for sparking a move in EUR/USD. EUR/USD tested this week’s low just south of 1.215 a few times before finally giving up that minor support zone around the time of the ECB minutes. The currency pair is currently changing hands in the 1.212 area. The parallel technical reference on the trade-weighted greenback is being tested as we write but a break higher hasn’t materialized yet. DXY is filling bids around 90.47. USD/JPY ekes out a small gain to trade just north of 104. EUR/GBP followed the dollar script. The pair is slightly down for the day and in fierce competition with the 0.89 mark. The zloty is the regional underperformer after the Polish central bank added FX interventions effectively to its policy toolkit yesterday. EUR/PLN is trading at 4.543.
News Headlines
Germany’s Statistics Office estimated flat GDP growth in Q4, resulting in a 5% GDP contraction for the calendar year 2020, less than feared and less than after the global financial crisis (-5.7%). Details showed a 6% decline in personal consumption, a negative contribution from net exports (exports -10%; imports -8.5%) while government spending cushioned the blow (+3.4%). Looking forward, the statistics office expects pent-up spending power to boost household spending from Q2 2021 onwards. Net savings rose to 16.3% last year.
Minutes of the previous ECB meeting showed a rare divide on the central bank’s next stimulus package. Differences are usually settled out in advance of the regular policy meetings. Chief economist Lane’s proposal on increasing banks’ borrowing allowance had been watered down as was the initial suggestion to raise PEPP by €750bn. The envelope was eventually increased by €500bn. Attention was drawn to possible constraints on, and side effects of, additional purchases, such as the risks of moral hazard, fiscal dominance and distorted market functioning.
