Investors still ponder the consequences of the ‘amended guidance’ from yesterday’s Fed minutes. If omicron doesn’t derail the recovery, a return to monetary ‘normality’ might be the market narrative for 2022. For the Fed, and probably also for other central banks, it means faster rate hikes than anticipated until now and a (gradual) removal of the liquidity support from the CB’s balance sheet. Follow-through price action intraday lifted US yields by up to 4 bps across the curve, although the move lost momentum as US investors joined. The 2-y yield currently rises to 3.5 bps. The 30-y gains 2 bps. The recent flattening tendency isn’t completely over, but the debate on a reduction of the balance sheet tempers the relative attractiveness of the longer end of the curve. European interest rates join the boarder intraday rise but gains remain modest given the moves in the US yesterday. German yields are rising between 1 bp (30-y) and 3 bpseco (5-y). After yesterday’s amended Fed guidance, signs of growth holding well above trend might be at least as important to assess the pace of further (Fed) normalization as is the case for inflation data. US weekly jobless claims printed slightly higher than expected at 207 000, but don’t change the picture with tomorrow’s US payrolls next key reference for markets. The US services ISM, came in below expectations (62 vs 67 expected) but leaves no significant mark on trading. German preliminary HICP eased slightly less than expected from 6.0% Y/Y to 5.7%. The way back lower to the 2.0% target remains a very long journey. For now, peripheral bonds also hold relatively resilient despite the prospect of faster global tightening (10-y Italian spread + 2 bps). The rise in (real) yields also triggered a correction on European equity markets with regional indices losing 1%. US indices open marginally higher after yesterday’s sell-off. Oil is extending gains north of $80 p/b.
Yesterday’s message from the Fed Minutes had far less impact on FX. The dollar is treading water. The DXY TW index is even losing a few ticks (96.1). EUR/USD gains marginally (1.1320). Remarkably, the yen isn’t hurt by the rise in US real yields and even profits from a hesitant risk sentiment. USD/JPY hovers in the upper half of the 115 big figure. Admittedly, it’s too early to call a trend reversal, too. The European safe haven currency shows a different reaction, with EUR/CHF extending yesterday’s rebound (1.039). A rise in core (real) yields in theory is a negative for the likes of CE currencies. However, the Czech National bank, the Hungarian national bank and the National Bank of Poland apparently convinced investors on their anti-inflation policy. The zloty (EUR/PLN 4.5575), the forint (EUR/HUF359.8) and the Czech koruna (EUR/CZK 24.52), after a cautious start, are all recording nice intraday gains, setting or testing multi-month strongest levels against the euro.
The Hungarian central bank kept its weekly deposit rate unchanged at 4% following seven consecutive hikes and coming from 1.8% on November 11. The recent strengthening of the forint away from the EUR/HUF 370 resistance gave the MNB some breathing space. The central bank officially convenes next on January 25 and now has better prospects to get to that deadline without having to widen the interest rate corridor again on an ad hoc meeting. The Hungarian marginal lending rate, the de facto cap for the 1-week deposit rate, currently stands at 4.4%. The forint retains its momentum with EUR/HUF changing hands at 360 for the first time since early November.
The ruling Turkish AK Party submitted a bill to legislators granting the Ministry of Treasury and Finance the power to issue specially designed bonds. These could be used to pay lira deposit holders additional interest should the currency depreciate again and are part of Erdogan’s plan to curb the lira’s freefall. Erdogan at the end of last year guaranteed that returns on TRY-denominated deposits wouldn’t fall short of bank interest rates. The special bonds can’t be traded on the bond market, but banks can use them as collateral to borrow from the central bank via repurchase agreements. Erdogan’s save the lira plan initially sent EUR/TRY down from 20 to 12, but the currency restarted its depreciating trend afterwards, trading currently at EUR/TRY 15.50.