With US cash markets closed for Martin Luther King Jr. holiday, trading remained very subdued at the start of the new week. It doesn’t help either that there were no important economic data scheduled for release. The World Economic Forum kicked off in Davos today but there too the news flow still had to pick up. Comments from central bankers were limited to ECB’s Rehn repeating the current mantra that policy rates will still have to rise significantly to levels that are restrictive enough to bring inflation timely back to target. By acting swiftly, Rehn said, the ECB should be able to avoid a so-called Volcker shock. But German/European yields weren’t really impressed. An early upleg that brought them several (4 to 5) bps higher was based on air and evaporated soon enough. Yields currently trade close to unchanged. That intraday reversal also capped the euro’s upside momentum. EUR/USD tested recent highs below 1.09 before paring gains back to the low 1.08 area. The Japanese yen (USD/JPY 128.49) underperforms peers today after a stellar run over the previous days. This brings us to one of the most closely watched events for this week; the BoJ.
The Japanese central bank meets this Wednesday. Back in December, it unexpectedly doubled the allowed deviation from the 0% 10-y yield cap from 25 to 50 bps. The news sent shockwaves through markets. The BoJ said this was to improve bond-market functioning with markets consistently pushing yields against the 0.25% upper limit in a context of rising inflation. It triggered near-constant BoJ bond-buying over the past few months. This is still the case today even with the higher cap. Investors saw the move as the beginning of the end of YCC and will probably see their case confirmed if, as currently is speculated here and there, the BoJ raises the yield bar again this week. Eventually, the BoJ twist could even lead to rate hikes when the new governor takes over from Kuroda in April. Upgraded inflation forecasts (nearing 2% at the end of the horizon, as cited by Japanese business newspaper Nikkei) could serve as the decisive argument. The Norges Bank also meets this week (Thursday). There are no new forecasts this time around. Headline inflation eased slightly more than expected in the December projections but the more sticky core inflation unexpectedly rose (5.8%). In this respect, we’re keen to see whether the central bank sticks to its forecasted terminal rate of 3%. The NOK weakening since Norges Bank (in particular vs the euro) was also bigger than expected. Other things to watch this week include Chinese Q1 GDP numbers, earnings season kicking in higher gear and an extensive UK economic update with the labour market report tomorrow, December inflation on Wednesday and retail sales on Friday. Sticking to the UK, the country got some bad news coming from DBRS Morningstar this morning (see below).
DBRS Morningstar, the number 4 global credit rating agency, downgraded the UK credit rating from AA (high) to AA with a stable trend. The downgrade reflects UK policy becoming less predictable and no longer compatible with a higher rating. DBRS specifically refers to the volatile period in September/October of last year where the interim-tandem Truss/Kwarteng was throwing away the UK’s credibility via unfunded spending proposals. Although the high degree of uncertainty has receded, the swift changes in economic policies in recent months have affected the predictability of UK policy. The UK is rated AA at S&P and one notch lower at both Fitch (AA-) and Moody’s (Aa3). All ratings come with a negative outlook attached.
US Treasury Secretary Yellen will hold a surprise meeting with Chinese vice-premier Liu He on Wednesday morning at the sidelines of the World Economic Forum in Davos. It’s their first 1-on-1 live encounter which stems from US President Biden and Chinese PM Xi Jinping’s meeting in November of last year at the G20-Summit. Both countries aim to dethaw their relationship which hit rock-bottom during the Trump presidency although they remain at odds over thorny issues such as trade, Taiwan, human rights and access to technology. The meeting will probably be highly symbolic in nature while nevertheless laying the groundwork for a visit by US Secretary of State Blinken to China early this year.