The risk-on rebound from Monday simply continued yesterday. The ‘noise’ from the Reddit short squeeze gradually evaporated. Equity markets again enjoyed the prospect of more US fiscal stimulus as the Biden administration steps up preparations to pass legislation through Congress, with or (most likely?) without bipartisan support. Better than feared EMU Q4 growth also helped a constructive mood. European equites rose about 1.50%. US indices closed with similar gains. Brent oil touched a post-corona top at $58 p/b. US yields rose modestly between 0.6bps and 1.7 bps (10y), driven by a further rise in inflation expectations. German Bunds even slightly underperformed with the curve steepening between 0.4 bps (2y) and 3.4 bps (30y). The USD again ignored the standard reflation trade script.
EUR/USD even came close to the key 1.2011 support. However, a break didn’t occur yet, amongst other as the euro rebounded on headlines that former ECB Chair Drahi was the frontrunner to become Italian Prime Minister. The pair closed at 1.2044. The USD gain this time wasn’t supported by a higher real US yield. USD/JPY closed near the 105 barrier. Constructive risk sentiment and ongoing positive headlines on progress in the UK vaccination process continued supporting sterling, especially against the euro. EUR/GBP closed at 0.8812.
Asian equities mostly show modest gains of up to 1.0% this morning. The China Caixin services PMI dropped rather sharply from 56.3 to 52.0. The Chinese yuan trades little changed near USD/CNY 6.46 as the PBOC balances liquidity ahead of the Lunar New Year. US futures are supported by good earnings from the likes of Alphabet and Amazon. US yields are still drifting cautiously higher while the trade-weighted dollar index (DXY) hovers near 91. EUR/USD is still at risk for a retest of the 1.2011 area.
Today’s eco calendar contains the final EMU services PMI, EMU January CPI data, the US private ADP job report and Services ISM. The EMU flash CPI often passes largely unnoticed. This time we keep a closer eye. Individual country releases, including from Germany, France and Spain already showed an unexpected uptick. Headline CPI is expected to rise to 0.6% Y/Y from -0.3% Y/Y. Core inflation might jump from 0.2% to 0.9%. Even as part of the rise is due to factors that are deemed technical and temporary in nature, we look out whether the report has any impact on EMU inflation expectations or yields. The German 10y yield is again approaching the -0.45% range top. The EU 10y swap rate is close to similar resistance near -0.15%. ADP private job growth is expected at a modest 50k (from -123k). The services ISM is expected to feel some headwinds from the new Covid-wave. If the setback remains modest, markets probably will look through it, hoping for better times ahead due to progress in vaccinations and additional fiscal support. Recently, EUR/USD both suffered from ‘remarkable’ USD strength (despite risk-on), but also from euro softness as the EMU economy is at risk to lag the rebound in the US and/or the UK. The jury is still out, but a sustained break below 1.2011 (previous top) would put the EUR/USD uptrend on hold and make the short-term picture for the dollar again more neutral. Similar dynamics are in play at EUR/GBP which tries to take out the psychologic 0.88 mark.
New Zealand’s Q4 labour market report beat expectations. Employment grew by 0.6% Q/Q with the unemployment rate dropping from 5.3% to 4.9% while consensus forecast a rise to 5.6%. The participation rate increased modestly from 70.1% to 70.2% with wage growth decelerating way less than anticipated (1.1% Q/Q from 1.4% Q/Q vs 0.3% Q/Q expected). New Zealand already reached pre-covid levels in the three months through September with the labour market catching-up with the V-shaped recovery. Data ease pressure on the RBNZ when it meets Feb 24. NZD/USD rose from 0.7160 to 0.7220 with the NZ 10y government bond yield rising more 10 bps to the highest level (1.33%) since April.