Market movers today
It is the big CPI week with US inflation on Thursday as the highlight. It will be yet another key input to whether the Fed hikes 25bp or 50bp at the February meeting. CPI releases are also due in Sweden, Norway and Denmark. More Fed speeches this week will also be interesting to gauge Fed members’ interpretation of the last employment report last week.
Today we kick off the week with Euro Sentix, which tends to lead Euro PMI 1-2 months. It has improved the past two months but from low levels. Euro unemployment will give more input to whether weaker activity is feeding through to the tight labour market. Consensus is for an unchanged rate at 6.5%. German industrial production is also due this morning, which follows very weak German factory orders released Friday.
The 60 second overview
Soft US data: While a lower-than-expected average hourly earnings sparked a modest market rally after the Jobs Report release, the main market mover of Friday was the clear downside surprise in December ISM Services, which sent equities and EUR/USD higher amid easing rate hike fears. The new orders index recorded the largest monthly decline since the initial Covid-shock. While private consumption and the service sector have been surprisingly resilient so far, majority of the leading indicators are now on recessionary territory, supporting our call for a modest US recession from Q2. The Jobs Report illustrated that the growth in US wage sum is now returning to more normal levels, which combined with easing economic activity suggests that Fed is moving in the right direction.
However, the easing of financial conditions from lower bond yields, weaker USD and higher equities may challenge the Fed as it could drive an earlier recovery and make inflationary pressures rebound.
Fed speakers cautious: After the data releases, Fed’s Bostic and Barkin sounded open to more gradual rate hikes, but still cautioned against prematurely easing monetary policy. Bostic said he still favoured raising rates above 5%, 75bp higher than todays level. The market now prices two hikes of 25bp. We look for a 50bp hike in February, and expect Core CPI to pick up to 0.3% on Thursday, but the recent data has decreased the risk of Fed having to hike much beyond 5%.
ECB’s Lane says wages to keep pressure on inflation: ECB’s Chief Economist and member of the Governing Council Philip Lane cautioned on Friday against putting too much into the decline in energy prices saying the original energy shock from the Russia’s war in Ukraine would feed into wages for two to three years. He also stated, though, that long-term inflation expectations are strongly anchored and stressed that due to the high uncertainty policy will be data-dependant.
Pro-Bolsonary rioters storms government institutions: Tens of thousands of anti-democratic demonstrators on Sunday invaded the Supreme Court, Congress and the presidential palace. Late on Sunday, Brazil’s Supreme Court removed the Governor of Brasilia from office for 90 days for flaws in security.
China reopened borders on Sunday: China removed one of the last pieces of the zero-covid policy on Sunday when borders were re-opened for inbound travellers. It is set to boost both inbound and outbound travelling as business people and Chinese living abroad have waited for this to happen and Chinese tourists can now travel again. It is likely to lead to a boost in airline traffic and lift oil demand.
Equities: Not all good news are bad news for markets. A strong job market accompanied by weakening wages sent equities into risk on (478 of all 500 companies in green). Cyclicals led the gains, including materials, tech, real state and industrials adding 3% in the US session. Alike the past three weeks, this did not translate into a growth-vs-value rally, but instead both styles gained in tandem. All in all, a very strong week for equities with Europe and Stockholm up 5% and US and Nordics 2% (basically back at last month’s high).
Credit: Last week marked a busy start to the year in terms of primary issuance particularly from FIG issuers, with more than EUR33bn priced in euros as well as some EUR7bn of corporate debt being issued. It seems that issuers are eager to front-load their supply given the well-flagged macro risks lurking ahead, and this also seems to be reflected by the fact that we have already seen five subordinated notes issues as well as several issuers being active in the market in various formats and currencies. Spreads seem to have held up well with iTraxx Main tightening 9bp during the week to 82bp including 5bp on Friday alone, while Xover has tightened by 48bp to 426bp (Friday: tigher by 23bp).
FI: US government bond yields collapsed on Friday after the lower than expected wage growth as well as lower than expected ISM service. Hence, the labour market was not as strong as seen on the surface. 10Y US Treasury declined more than 15bp on Friday, while 2Y yields declined 20bp.
FX: USD dropped following the US jobs report on Friday, where the market took note of slowing wage growth. EUR/USD rebounded above 1.06 and USD/JPY dropped below 132 again. CNH continues to strengthen against USD on China’s reopening.
Nordics
There are no key movers today but we await the batch of CPI data coming out this week with Norway and Denmark releases on Tuesday and Sweden on Friday, see Weekly Focus for comments on each country.
