In line with the start of the new year on Monday in Europe, US investors apparently prepared/hoped for inflationary pressures to gradually ease in the upcoming year. Even with few data to support this view, US yields joined the European bond market rally with US yields declining between 5.6 bps (2-y) and 13.7 bps (10-y). European bonds enjoyed follow-through gains too, supported by a faster-than-excepted slowing in December German inflation. Headline HICP inflation dropped 1.2 % M/M ‘easing’ the Y/Y price rise to 9.6%, down from 11.3% Y/Y in November. However, a big part of the decline was due to government measures to mitigate consumers’ energy bills. At the same time, food prices continue to rise. Next to the inflation data, December German unemployment data pointed the persistent labour market resilience with a decline in the number of unemployed (-15k) lowering the unemployment rate to 5.5%. This suggests a risk of ongoing upside wage pressures. At least for now, investors were happy to embrace the lower-than-expected headline inflation. A decline in oil and European gas prices, supported this narrative. German yields eased another 3.9 bps (2-y) to 8.7 bps (30-y). Contrary to what happened in Europe, the bond rally didn’t help US equities with the Dow closing little changed (-0.03%) and the Nasdaq ceding 0.76%. Europe again outperformed (EuroStoxx50 +0.68%). FX market showed a mixed picture. A combination of USD strength and euro softness pushed EUR/USD off a cliff (close 1.0548 from an open of 1.0667). Sterling declined against the dollar (cable close 1.1968) but gained against the euro (close 0.8813). The yen initially continued its outperformance, but returned gains later the session, closing at 131.02. The test of the key 130.41/58 support area continues.
This morning, Hong Kong, South Korean and Australian shares gain, amongst others, supported by headlines that China might provide additional support for its ailing property sector. Japanese equities decline on a strong yen. The positive risk sentiment arrests further USD gains (DXY 104.5). The yuan (USD/CNY 6.894) and the yen (USD/JPY 130.80) remain well bid. EUR/USD (1.0565) gains modestly.
Later today, French CPI data (expected 0.40% and 7.30% from 7.10%) probably will show slightly different dynamics from the German data. In the US, the manufacturing ISM (expected at 48.5 from 49.0) and the JOLTS job openings will bring new insights on the pace of slowdown in the US economy. Later, the Fed will publish the minutes of ‘hawkish’ December 14 Fed policy meeting. The day-to-day momentum clearly is bond-friendly. At the same time, US markets already discount quite some ‘softness’ (only a 30% chance of a 50 bps early February rate hike vs 25 bps). In this context, data showing economic resilience might slow the bond market rally. On FX markets, the dollar might remain better bid short term. It probably will take really negative US data surprises for EUR/USD to return to the 1.0735 resistance soon.
Chinese officials are mulling to resume some imports of Australian coal after a more than two-year ban, Bloomberg news agency reported. Beijing imposed the restrictions in late 2020 following amongst others Australia’s call for an independent investigation into the origins of the coronavirus which further damaged an already strained relationship. Australian foreign minister Penny Wong traveled to China in December for the first official visit in years in tentative signs of a thaw. By lifting the ban, China seeks to prevent any repeat of the broad power outages in 2021 and to a lesser extent in 2022 while Europe’s Russian oil restrictions could significantly increase demand/competition for coal from other key Chinese suppliers including Indonesia. The Aussie dollar soared on the news, outperforming in the G10 area. AUD/USD is testing the 0.68 big figure, up from 0.6727.
The since the midterms Republican-led US House of Representatives adjourned after Kevin McCarthy failed to secure a simple majority during the election for Speaker. He was shy 15 votes in the first round, making him the first majority party leader in a century to fail. Two subsequent rounds of voting didn’t yield a result either. Because of the ultra-thin Republican majority, the group of people voting against McCarthy have an outsized influence in the ballot. They were left disappointed after the predicted red wave during the midterms did not materialize and press for change in the party. The House cannot function without a Speaker and the process could drag on for days until McCarthy is able to garner enough support or steps aside in the race.