The (anti-)inflation hype that dominated markets and Fed speak at the start of the year finally took a breather after yesterday’s US CPI (7.0%) printing at the highest level in almost 40 years. Fed governors recently came to a consensus that runaway inflation and a tight labour market ask for an interest rate lift-off at the March meeting. Three rate hikes this year is a minimum, more is likely, as is an early reduction of the Fed balance sheet. However, yesterday’s post-CPI reaction indicated that this scenario is discounted. ‘New news’ is needed for markets to further ride the policy normalization trade. Today’s data didn’t provide that. US PPI inflation printed close to expectations (final demand at 9.7% Y/Y from 9.8%). US jobless claims even surprised on the soft side of expectations rising from 207 000 to 230 000. The new corona spike might be in play but statistical issues probably also complicate a correct interpretation. The releases had no big impact, but allowed yesterday’s correction to continue. Aside from a thin news flow, technical considerations also continued hampering further directional price action on core interest rate markets. US yields are losing about 1-2 bps across the curve. The US 10-y yield (1.73%) eases slightly further off the key 1.80%/1.77% resistance area. The German 10-y yield (-0.07%) also lacks impetus to try to leave negative territory. ECB’s de Guindos admitted that inflation might not be as transitory as earlier thought. He considers the development in energy prices to be key for inflation. However, he still sees no second round effects in term of wage pressures. So, for now, he doesn’t draw any ‘hawkish’ conclusions on monetary policy yet. The German yields curve (temporarily) returned to ‘standard habits’, bull flattening with yields declining between 0.6 bp (2-y) and 3.0 bps (30-y). European equities mostly trade with gains of less than 0.5%. US indices open marginally stronger. Brent oil is holding within reach of the $85 p/b level.
Despite no high profile news, the dollar endures further post-CPI follow-through losses. Persistent high (absolute and relative) inflation and the Fed mainly frontloading policy tightening rather than guiding on a higher rate path further down the road apparently made USD bulls conclude that enough is discounted for now. DXY is testing the 94.70 area (from 95.00). USD/JPY is changing hands in the 114.25 area. EUR/USD also joins the broader dollar setback trading near 1.147. The dollar decline not only supported the likes of the euro and the yen. Yesterday’s reversal of softer yields and a weaker dollar also aborted a tentative weakening trend of the Swiss franc. EUR/CHF early this week touched the 1.05 barrier, but currently again trades at 1.044. In the Nordic region, the Swedish crown, after a strong performance by its Norwegian neighbor, tries to regain some ground and is testing the EUR/SEK 10.21 resistance area.News Headlines
European bond sales are breaking records. In the current, not even full, week, companies, supranationals and sovereign issuers already hit the market for a total of about €93 bn according to Bloomberg calculations. The previous weekly record dates back to early January, when some €92 bn was issued in the week to January 10. Issuers are locking in still very favourable financing conditions quickly as inflation, the Fed’s tightening intentions as well as the ECB set to start winding down bond purchases are causing uncertainty about yields going forward.
Working-day adjusted Czech retail sales surged 11.7% y/y in November. The huge increase was to a large extent driven by the low comparison base due to Covid (sales) restrictions end 2020. Monthly retail sales dynamics in fact showed a decline in retail turnover of 1%. The base effect is especially visible in the sharp rise of eg. non-food (ie coming from non-essential stores) goods (+20.8% y/y). Sales in online shops only rose a modest 0.6% y/y as they were a substitution for physical shops during the lockdown. The Czech koruna is losing the most since end November against the euro today though the move is rooted in overall fragile risk sentiment. EUR/CZK trades at 24.43, up from 24.31 yesterday.