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Bank of Japan Keeps a Steady Hand

Market movers today

Today’s focus will be on hard data from the US as we get the December PPI, retail sales and industrial production. Retail sales is the most important number, as it will be the first piece of hard data for December and will give us a sense of whether the sharp slowdown illustrated by the ISM services actually took place.

UK inflation for December out today will also be an important input ahead of Bank of England’s rate decision at the beginning of February. Expectations are for further eased price pressure with headline to print 10.5% from earlier 10.7%. Also underlying inflation is expected to continue lower.

In euro area, we get the final HICP data for December, which includes more details than the flash print. On central bank calendar, ECB’s Villeroy and Fed’s Bostic and Harker are scheduled to speak. The Fed will also release its Beige Book.

The 60 second overview

Bank of Japan: Bank of Japan decided to keep monetary policy unchanged at its meeting overnight. The market had speculated another hike of the cap over 10Y yields could come and was left disappointed, which triggered a rally in USD/JPY above 131. We stick to our view that a policy rate hike to 0% and another hike in the yield curve control target awaits in Q2 23.

ECB: In light of the improved growth and inflation outlook, ECB sources reported yesterday that policymakers are starting to consider a slower pace of rate hikes than President Lagarde indicated in December. While the 50bp hike in February she signalled remains likely, the prospect of a smaller 25bp increase at the following meeting in March is gaining support according to officials. The news added to the European fixed income rally, with implied ECB peak rate pricing now down to 3.3% from 3.5% earlier, while EUR/USD returned below 1.08.

European economy: The euro optimism got another boost yesterday, after German ZEW expectations showed a larger than expected rebound in January, turning positive for the first time since Russia’s invasion of Ukraine. The German economy has been holding up better than feared, thanks to a range of tailwinds from mild weather to a large order backlog and easing supply bottlenecks in industry. ZEW signals that the recent rebound in leading indicators could persist into Q1, suggesting that the European recession could actually be milder and shorter than we have previously anticipated. That said, the assessment of current economic conditions remains at more depressed levels and we still think challenging times await the German economy in 2023, as energy worries remain, order books are emptying and consumers will face another year of real income losses. Higher interest rates have already started to cool construction and housing market activity and downside risks remain also for the labour market. Stepped up investments in infrastructure, digitalisation and the green transition as well as positive spill-over effects from Chinese pent-up demand are upside risks to the outlook. But the German growth model remains in an adjustment phase and until the energy crisis is truly resolved, Germany is unlikely to return as the euro area’s economic powerhouse anytime soon.

FI: Yesterday, European bond yields and interest rates declined significantly in the afternoon on the back of comments from ECB officials that stated that ECB would hike 50bp in February and then slow down to 25bp in March and ending with a terminal rate of 3.25%. The officials stated that the comments were “anonymous” and normally the market would ignore these kind of statements. However, this was apparently coming from ECB sources and thus the market reacted much more than usual, as this is clearly a dovish comments.

This morning Bank of Japan did not change their monetary policy and 10Y JGBs rallied 10bp.

FX: Broad EUR weakness following yesterday’s ECB sources story, hinting that 25bp increments might be the way to go beyond the February meeting. EUR/USD fell almost a full big figure on the story but notably we are also seeing relative EUR weakness against Scandies as well. USD/JPY rallies back above 130 again on Bank of Japan’s decision to keep monetary policy unchanged.

Credit: The Credit market is still seeing significant new issue activity which takes most of the attention. Spreads saw only small changes with iTraxx Xover 4bp wider at 411bp. Main was 1bp wider at 79bp.

Danske Bank
Danske Bankhttp://www.danskebank.com/danskeresearch
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