Market movers today
- We do not expect any policy changes at the Bank of England (BoE) meeting and all focus is on any signals on whether the BoE considers cutting into negative or not. We expect the BoE to refrain cutting but keep the possibility open.
- We also get euro retail sales for December. In November retail sales plunged by 6.1% m/m, and German retail sales released on Monday was very week so this may point to another grim reading despite the Christmas related spending. But the lockdowns give extra uncertainty around the number.
- US initial jobless claims and ECB monthly bulletin are also released today.
The 60 second overview
US Fed: A number of Fed officials hit the wires yesterday. In general, many expect a strong recovery for the US in H2 and some officials mentioned we could see unemployment around or lower than 5% by year-end. Their approach is clearly data dependent but financial markets have also increasingly turned upbeat on the prospects for a US recovery which is much faster than after the financial crisis. This has also helped strengthen the dollar.
European inflation jumped: As expected, the January HICP headline jumped 1.1pp to 0.9%, driven primarily by a jump in core inflation from 0.2% to 1.4% (record high jump). The jump in core inflation is linked to the fall out of the temporary VAT cut in Germany. We expect that high volatility in inflation will continue in coming months. All in all, it is too early to conclude the fundamental strength of the inflation prices, despite core inflation being at 5y high. Irrespective of the strong print for inflation, markets also took little notice. We expect ECB to remain unchanged even on the back of this. See more in Euro Area Macro Monitor – Cautiously optimistic.
Poland: The Polish central bank kept its policy rate unchanged and signalled commitment to keep the Zloty weak enough to underpin the recovery of the Polish economy, if needed with FX intervention. The EUR/PLN halted its downward trend yesterday and we think that the cross will continue to hover around 4.50 for some time, which seems to be the central bank’s preferred exchange rate floor, unless we see a sudden markedly rebound in the Polish economy.
Dollar: Although the downward momentum in EUR/USD appears to have faded a bit, incoming data continues to suggest the US recovery could be pulling ahead from the Euro Area’s. China’s Caixin PMI services fell more than expected to 52.0 from 56.3, which adds to the picture of fading momentum in the Chinese economy. Meanwhile, the ISM for US services rose a bit from already elevated levels. For EUR/USD, this means the EUR-positive export-heavy tailwind from China is shifting gear this year and Fed may need to reign in its QE programme during H2. While large uncertainty persists in terms of the dollar forecast, risks have shifted in favour of the dollar going higher during the year.
Equities: Markets finished higher Wednesday, but only modestly so. Energy led the market on crude oil strength together with communications services, driven by Alphabet earnings. Other sectors finished fairly bunched, with healthcare, consumer discretionary and utilities trailing. Despite rising yields the value rotation never really materialized. Asian markets are retreating this morning, with China and South Korea most gloomy. US futures also indicate an opening in red, but only marginally so.
FI: Yesterday was all about the Italian political situation and Draghi being asked to form a caretaker government. BTPs-Bund spread tightened 8.9bp through the day yesterday pulling all other intra-EA spreads tighter as well. Semi-core spreads to Germany tightened 1bp amid the 2.5bp sell-off in the Bund.
FX: Commodity currencies, AUD, NOK, NZD and CAD rose the most yesterday as commodity prices increased. Note in particular, the oil price reached a new cycle high. EUR/USD has stabilised close to the 1.20 level.
Credit: Yesterday was another strong day in credit markets where iTraxx Xover tightened to 248bp (-8bp) and Main to 49bp (-1½bp). In cash bond space, HY tightened 6bp and IG 1½bp.
