Markets
This morning, US and European interest rate markets continued yesterday’s ‘unusual’ disconnect. European markets still reacted to yesterday’s ‘implicit’ U-turn of Chair Lagarde. She backtracked on the ‘temporary inflation’ narrative and didn’t repeat the mantra of no ECB rate hikes in 2022. The era of negative EMU interest rates is coming to an end. Money markets are embracing the idea that the ECB might raise its policy rate out of negative territory by the end of this year. US interest rates initially declined (albeit marginally) on rumours that omicron could cause a blip in the labour market recovery. However, it didn’t. On the contrary. According to the monthly BLS payrolls data, the US economy in January added 467 000 jobs, much more than the 125 000 expected . Any presumed softness at the end of last year was also overthrown by an impressive 709k upward revision. Wage growth (average hourly earnings) accelerated at an impressive 0.7% M/M (5.7% Y/Y). Even the rise in the unemployment rate (calculated from a different source/household survey) to 4.1% from 4.0% should be considered as good news as it was the result a higher participation rate. Admittedly, the interpretation of this data series was difficult due to statistical adjustments. Whatever, the overall picture only confirmed Chair Powell’s upbeat assessment on the labour market at the Fed press conference last week. US yields switched an initial cautious decline for yet another impressive jump higher, the short end still taking the lead. The curve bear flattens with the 2-y/5-y sector rising 10/9 bps and the 30-y +5.5 bps. The 2-y is again setting a new cycle peak (1.30%). The 10-y is testing the 1.90% top! German yields, were 4.5/2.5 bps higher before the payrolls and extended their post-ECB follow-through rise. Yields are rising 6 bps for the 2-y, 7 bps for the 5-y and 5 bps for the 10-y. Curve flattening at the very long end keeps the 30-y little changed. The prospect of higher core EMU yields and the ECB expected to halt net asset purchases (APP) sooner than expected also hurts peripheral EMU bonds. 10-y year yields spreads versus Germany of Greece, Italy and Spain widen a further 12 bps, 5 bps and 3 bps respectively. European equities are losing up to 1-1.5% after yesterday’s WS losses. US indices show remarkable resilience (modest gains of 0.25%/0.50%) given the wild swings on interest rate markets.
The euro extended yesterday’s post-ECB gains this morning, with EUR/USD attacking the 1.1483 top. The payrolls prevented a break at this stage. At 1.1440, however, the euro is holding yesterday’s gain, which should be a promising sign for euro bulls. At the same time, the dollar extends gains against most other majors with DXY rebounding to the 96.60 area. The Swiss franc is ceding further ground (1.0560). Sterling is losing further ground against the euro (EUR/GBP 0.8450) and the dollar (cable 1.3530). In CE the forint and the Czech koruna are holding strong. The zloty underperforms.
News Headlines
Canadian payrolls showed that 200.1k jobs went bust in January. Markets expected a smaller setback (-110k). Details showed both full time (-82.7k) and part time (-117.4) jobs decreasing. The number of people who were employed but worked less than half their usual hours rose by 620k (+66.1%) in January, the largest increase since March 2020. The unemployment rate ticked up from 6% to 6.5% (first increase since April) with the labour force participation rate falling from 65.4% to 65%. Hourly wages rose by 2.4% Y/Y, down from 2.7% Y/Y in December. The Omicron-outbreak is to blame for the weak payrolls report as many jurisdictions implemented stricter public health measures. Accommodation and food services was the hardest-hit industry. USD/CAD gained a big figure from 1.2675 to 1.2775 and approaches the 2022 high (1.2814). The move is both inspired by USD-strength (post US payrolls) and CAD-weakness. The temporary labour market setback won’t interfere with the Bank of Canada’s intentions to start its tightening cycle in March.
