Markets
Trees don’t grow to sky. Even interest rate markets today took a breather as the combined effect of an ECB policy U-turn and strong US payrolls is apparently ‘discounted’. For now, it’s still nothing more than a pause, not a real correction, with tomorrow’s US inflation data a potential catalyst for further directional price action for bond markets. Central bankers’ comments don’t question the need for policy normalization, but don’t feel the need to push markets even further either. BoE’s chief economist Pill doesn’t rule out 50 bps steps but for now advocates a step-by-step approach as the outlook for wages and energy prices is highly uncertain. ECB’s Nagel confirmed that the ECB needs to recalibrate monetary policy in March if the inflation picture and above all the inflation outlook hasn’t significantly brightened by then. This shouldn’t be new for markets. At the same time, Nagel also warned for the risks/side effects of asset purchase programs. The jury on this topic is still out, but any (substantial) steps on the ECB reducing its balance sheet probably aren’t discounted by markets yet. Fed Bostic is still balanced between 3 and 4 rate hikes this year. He hopes for a gradual decline in M/M inflation readings in the near future to bring the PCE deflator to 3.0% by the end of the year. Still, he doesn’t exclude a 50 bps hike if the data would signal it to be appropriate. Bostic also advocates a substantial reduction of the balance sheet starting as soon as possible as he sees a lot of excess liquidity that can be reduced without representing a significant tightening. As indicated, today comments didn’t change the broader picture on policy normalization but didn’t prevent a limited countermove. US yields are developing between little changed (2-y) and easing 2.5 bps (10-y). This evening the US Treasury will sell $ 37 bln of 10-y Notes. On European interest rate markets the steepening trend continues, this time with the short end taking the lead. The German 2/5-y yields are easing 4.5 bps. The 30-y declines a more modest 0.75 bps. The relative calm on core bond markets for now brings only little relief for peripheral European bond markets with the 10-y Italian spread versus German easing no more than 2 bps. The pause in the bond market sell-off also revives some comfort among equity investors. European indices on average are rising about 1.75% (EuroStoxx). US indices continue yesterday’s comeback opening with gains of about 1.0%. (Brent) oil ($91.1 p/b) stays off its recent peak, but for now with no follow-through price action.
Despite substantial moves on bond and equity markets, changes in the major FX cross rates mostly are limited. DXY index eases to 95.50. EUR/USD is holding north of 1.14 but at 1.1430 gains are negligeable. The risk-on for now still doesn’t help sterling (cf Pill comments?). EUR/GBP is going nowhere holding in the 0.8430 area.
News Headlines
UK Prime Minister Johnson has announced he’ll end this month the requirement for people in England to self-isolate if they test positive for the coronavirus. It’s part of the government’s “Living with Covid” strategy – to be announced February 21 – and it is subject to the continuation of currently declining Covid statistics. The self-isolation obligation was due to end on March 24. By shelving the rules earlier, Johnson hopes to amend tarnished support from Conservative lawmakers who have been calling for easing restrictions amid concerns over individual freedoms and the impact on businesses, schools and health service.
Mexican inflation eased less than hoped in January, from 7.36% y/y to 7.07% vs 7.01% expected. Core inflation, excluding a.o. fuel, even accelerated from 5.94% to 6.21%, the highest reading since 2001 and way above the 3% (+/- 1ppt) inflation target of the central bank (Banxico). Its new governor Victoria Rodriguez Ceja faces a difficult balancing act when the MPC meets for the first time this year tomorrow: tighten policy and tame inflation but risk hurting already stalling growth (-0.1% q/q in Q4 2021). Banxico started its hiking cycle in June 2021 and raised policy rates from 4% then to 5.50% today. Consensus expect another 50 bps increase tomorrow. The Mexican peso strengthens marginally today, from USD/MXN 20.61 to 20.55.
