Markets
It was not about the December US payrolls report last Friday, but about the non-manufacturing ISM. The post-payrolls reaction – zooming in on slightly disappointing wage growth rather than on all other strong employment components, especially in the household survey – already suggested a willingness to respond in case of a below-consensus ISM. And that’s exactly what happened when the ISM (49.6 from 56.5) was not only below consensus (55), but also below the lowest estimate from the economic panel (53.3) and even below the 50 boom/bust mark for the first time since May 2020. Details showed a steep decline in overall business activity (54.7 from 64.7) and new orders (45.2 from 56 and also first <50 outcome since May 2020). The employment component returned below par (49.8 from 51.5) with prices paid still high in absolute terms (67.6), but the dynamic slowing. Supplier deliveries fell from 53.8 to 48.8, the lowest since 2015, and suggesting that supply side bottlenecks are evaporating.
Based on US money markets, the probability of a 50 bps Fed rate hike in February fell from roughly 50% to roughly 25%. If Fed chair Powell stresses that core services inflation is the one to follow, then that’s the consequence of the awful services ISM. Looking beyond that early February Fed meeting, money markets put the policy rate peak at 5% while sticking with the view that rate cuts will follow in H2 2023. Both go firmly against all Fed guidance, including in several speeches delivered only a week ago, an our house view. Returning to Friday’s market moves, core bonds leaped higher with US Treasuries outperforming German Bunds. Daily changes on the US yield curve varied between -22.4 bps (3-yr) and -10.7 bps (30-yr) with the curve turning less inverse. German yields lost 5.9 bps (2-yr) to 10.5 bps (10-yr). The dollar lost out against all majors. The trade-weighted greenback closed the week below 104, with the December sell-off lows approaching (103.39). EUR/USD erased all of the early January losses, surging from 1.0522 to 1.0644 and extending the gains this morning. Equity markets embraced their goldilocks scenario (strong labour market, weakening inflation pressure and expectations on near Fed policy reversal), rebounding 2% to 2.5% for all major US indices.
Asian risk sentiment remains buoyant this morning. Japanese markets are closed for Coming-of-age day. Eco calendars are empty on both sides of the Atlantic and across the Channel apart from speeches by central bank governors. It suggests that the post-ISM momentum could be extended. Later this week, we pay attention to the US refinancing operation as well as to EMU (new) supply in light of the ECB’s exit as a net buyer. Eco data include US CPI inflation (Thursday) and University of Michigan consumer confidence (January) on Friday.
News Headlines
Czech Central Bank governor Michl reiterated the CNB baseline scenario that inflation is expected to slow considerably from spring, even as inflation might still go up in the first two months of the year. At the same time, the CNB governor stressed that spending from both consumers and the government needs to ease down in order to tame inflation and prevent that the CNB needs to raise rates further. Consumers should save and wage growth demands should stay moderate. The government should keep the budget deficit as low as possible and be cautious on boosting welfare spending and provide subsidies that go against the restrictive CNB policy. At EUR/CZK 23.96, the Czech korona currently trades near the strongest level since early 2011 when it touched the EUR/CZK 23.93 level.
The Indian government expects economic growth in the fiscal year 2022/23 ending in March to slow to 7%, compared to 8.7% in the fiscal year 2021/22. Earlier, the government expected growth in the 8-8.5% range. Construction growth was projected at 9.1%, electricity at 9% and agriculture at 3.5%. Manufacturing and mining growth were forecast at 1.6% and 2.4%. In an interview with the Financial Times, the governor of the Central Bank of India, Shaktikanta Das, indicated that he was optimistic about India’s growth and financial stability. However, the fall-out of growing debt distress among regional trading partner might have spillovers toward India’s economy. India’s foreign exchanges reserves have declined from a peak in 2021 due to interventions to stabilize the currency. However, at the current level of reserves of about $563 bln, Das sees this as a still ‘very comfortable level’.
