Markets
The ECB kept policy unchanged yesterday. During an overall cautiously optimistic but not very informative press conference, ECB president Lagarde said the bank’s aims is to preserve favourable financing conditions across the euro zone and will adjust policy accordingly. For the first time however, the policy statement formally notes this could also mean PEPP would not be used in full if favourable financing conditions can be maintained with asset purchase flows that do not exhaust the envelope over the net purchase horizon. This is not new per se: Lagarde has mentioned this possibility earlier and extrapolating the ECB’s current bond buying pace to March 2022 (when net buying is scheduled to end) leads to the same conclusion. Nevertheless, it sent bond yields soaring, both in core and peripheral countries. The German yield curve bear steepened with changes varying from 1 bp (2-yr) to 4 bps (30-yr). Peripheral spreads widened with Italy underperforming (+3 bps). US yields jumped up to 4 to 4.3 bps at the very long end, buoyed by stronger-than-expected economic data. EUR/USD traded a bit volatile during the ECB press conference but eventually finished higher, mainly on dollar weakness even as risk sentiment was fairly fragile. The pair ended at 1.216, up from 1.21. Sterling tried another break below EUR/GPB 0.886 but again closed the session on that key support area. Markets await important data to be published later today.
Asian stocks trade in the red following WS’s lackluster performance yesterday. Hong Kong underperforms after reporting it will lock down part of the Kowloon district. Japanese PMIs declined in January after the reimposition of the state of emergency (cf. infra). Core bonds trade stable to slightly higher. The dollar recoups some of yesterday’s losses, capping an early attempt by EUR/USD to extend gains. The trade-weighted DXY stabilizes in the low 90 area. USD/JPY advances to 103.62. USD/CNY gaps higher to 6.47 but remains within the sideways consolidation range.
European PMIs are today’s highlight on the economic calendar. Consensus expects a setback from the December levels (EMU composite 49.1 to 47.6 expected) as the full impact from stricter lockdowns becomes clear, especially in the likes of Germany. Risks if any are slightly tilted to the downside based on high-frequency indicators suggesting lower activity in January. This might provide core bonds an opportunity to recover partially from yesterday’s hit and lead to a pause in the recent bottoming out process in EUR/USD, especially if risk sentiment stays slightly risk-off. Today’s UK data deserve the attention more than usual with sterling at important technical crossroads. December retail sales (0.4% m/m ex car fuel, 0.3% m/m headline) disappointed this morning, leading EUR/GBP to extend early gains to 0.8885. (Disappointing?) UK PMIs later today will decide over the short-term technical faith of sterling.
News Headlines
New Zealand Q4 inflation rose by 0.5% Q/Q and 1.4% Q/Q versus 1.1% expected. The outcome was also higher than the RBNZ November forecast (1.1%). The rise in inflation follows a faster than expected economic rebound. Holiday accommodation, home construction costs and airfares supported the price rise. Underlying inflation (excl. food fuel and energy prices) also rose from 1.7% to 2.1%. The higher than expected inflation data and signs of an economic recovery are reducing speculation on the need for RBNZ easing/rate cut (policy rate currently at 0.25%). A negative policy rate is becoming unlikely. NZD/USD temporarily ticked up to the 0.7220 area.
The core nationwide CPI (excluding oil, but including fresh food) fell 1.0% Y/Y, the biggest decline since September 2010. Headline inflation also dropped from -0.9% to -1.2%. In a separate report, Japanese PMIs also turned south in January. The manufacturing measure eased modestly from 50 to 49.7. The services indicator declined from 47.7 to 45.7 as the Japanese government established a partial state of emergency to contain the new wave of the corona virus. The yen hardly reacted to the data. USD/JPY hovers in the 103.50/60 area.
