Today’s economic calendar focused on euro zone CPI for January, which rebounded for the first time in six months into positive territory (0.9% y/y, up from -0.3% in December). Core inflation also jumped from 0.2% to 1.4% y/y, the highest level in more than five years. However, this acceleration in inflation was visible in other countries earlier, most notably in Germany, and to a large extent related to technical factors. Hence, the direct impact on (European) bond markets remained rather limited. European inflation expectations weren’t affected directly either, but they did rise during the day to the highest levels since (early) 2019 (1.35% – 1.38%). The US services ISM later unexpectedly increased from 57.7 to 58.7 (56.7 expected) thanks to a surge in new orders (61.8) and especially employment (55.2). The positive surprise supported the gradual uptrend in US yields, pushing the curve up to 3.4 bps higher at the long end. The US Treasury didn’t alter their planned issuance of longer-dated securities at a quarterly debt auction next week as they await the end result of the government’s fiscal stimulus talks. German yields do rise 1.5 bps (5-yr) to 3.6 bps (30-yr) in a choppy trading session, mainly carried higher by an overall constructive market sentiment that also lifts equities about half a percent higher. Peripheral yields tighten. Italy outperforms substantially (-10 bps) after Italian president Mattarella tapped former ECB president Draghi to form a government (cf. headline below).
As was the case recently, the dollar again to some extent decoupled for the broader reflation trade. Higher core yields and a global risk-on context still favour the dollar more than the euro. EUR/USD extensively tested the 1.2011/00 area, but for now no sustained break occurred. The trade-weighted USD index also held north of the 91-big figure, but with no further follow-through gains. A better than expected ADP report and solid US ISM also weren’t able to force a new USD upleg. USD/JPY hovers in the 105 area. Will Friday’s payrolls be able to decide on the near term fate of the US currency? Sterling also retained the benefit of the doubt. EUR/GBP is grinding ever closer to the 0.88 barrier. Markets are looking forward to tomorrow’s BoE policy decision, especially whether the Bank has still any new guidance to give on the key topic of negative interest rates. The final UK PMI was slightly upwardly revised to 41.2 from 40.6. Even so it still doesn’t suggest a clear UK economic outperformance anytime soon.
According to UK Business Minister Kwasi Kwarteng said the UK wants to put in place a more flexible system of subsidy rules compared to those that were applied with the UK was member of the EU. The change in subsidy rules aim to make Britain more attractive to investors but will stay within the terms of the agreement to leave to EU.
Former head of the European central bank, Mario Draghi was asked by Italian President Mattarella to form a new government that should primarily focus on tackling the corona crisis and the deep economic recession the country currently faces. Mario Draghi accepted the task. Draghi said he will look for a majority as broad as possible. However, for now, several of the parties he will contact are internally divided whether to support a Draghi government. The divide in support for Draghi is especially a topic for the biggest group in Parliament, the anti-established Party Five Star Movement.
Inflation in Turkey still rose a faster than expected 1.68% M/M and 14.97% Y/Y in January, up from 14.60% Y/Y in December. The higher than expected inflation is keeping pressure on the CBTR to keep a tight monetary policy stance. The rise in inflation is still partially due to previous weakness of the lira. Recently, central bank governor Agbal reinforced its commitment for inflation to be the top priority. At least today, the credibility of this engagement was not questioned by markets. The Turkish Lira held on to recent gains against the euro (EUR/TRY 8.6150).