This morning, the Reserve Bank of Australia’s post-meeting statement was a clear sign of the times. It’s too early to frontrun on an easy fix to (persistent) high inflation. Even Governor Lowe and Co, with a DNA that usually tries to avoid an unnecessary negative impact on growth, unequivocally admitted that ‘if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later’. No wait-and-see approach anymore that potentially translates into a pause. Further interest rate increases are likely. Despite this highly symbolic U-turn, the RBA decision/guidance only triggered a repositioning on domestic (interest rate) markets. Especially US yield markets already experienced an impressive run post-payrolls, more than reversing the dovish run earlier. The US 2-y and 10-y yield currently trade well above the levels after Powell’s FOMC press conference (2-y 4.45% vs 4.21%; 10-y 3.65 vs 3.50%). US yields for now take a breather (2-y -2.0 bps, 30-y +2.75 bps). Even so, Fed’s Kashkari today also erred to the hawkish side. Surprised by the strong payrolls, he sees a case for rates to be raised to 5.25/5.50%. Later today, Fed chair Powell in an interview at the Economic Club of Washington has the opportunity to make a more decisive impression compared to its ‘on the hand, on the other hand’ narrative last Wednesday. German yields also reversed the post-ECB setback. Yields are gaining across the curve today, albeit more modestly than over the previous sessions (2-y + 1 bp, 10-y +3.5 bps). According to the ECB’s consumer expectations survey, EMU consumers see inflation unchanged at 5.0% this year. Inflation expectations for the 3 years ahead were reported marginally higher at 3.0% (cf infra). No de-anchoring of expectations, but too high for the ECB to feel really comfortable, we think. For now, recent volatility in core bond markets has only limited impact on intra-EMU spreads versus German (10y Italian +1 bp, Greece +3 bps). Higher (real) yields are a potential negative for risk assets. But for now the damage for European equity markets remains limited (Euro Stoxx 50 -0.25%). US indices after yesterday’s setback open little changed. Oil stabilizes near $82 p/b.
On FX markets, the dollar easily maintains its post-payrolls’ gains. The DXY index gains a few more ticks (103.75). EUR/USD (1.0695) slipped below the 1.0735 support (Dec top), nearing next intermediate support at 1.0680 (23% retracement (Sept/Febr. rebound). USD/JPY is the exception to the rule. A big beat in Japanese wage data apparently revived speculation that the BOJ will have to amend its ultra-easy policy. The yen gains against a broadly stronger dollar (USD/JPY 131.9). Sterling failed to build on yesterday’s outperformance. EUR/GBP trades near 0.8935 (from 0.8910). Among the smaller currencies, the Norwegian krone remains a distinct underperformer with EUR/NOK (11.14) reaching the highest level since November 2020.
News & Views
In the ECB’s December survey, median consumer inflation expectations for the 12 months ahead were at an unchanged 5% but edged higher for the three year horizon, from 2.9% to 3%. Euro area consumers expect their nominal incomes to grow by only 1% over the next 12 months, slightly more than the 0.9% in November, while nominal spending is seen at 4.2% (down from 4.3%). Their economic assessment improved noticeably with growth the year ahead anticipated at -1.5% instead of -2% the month before. This made them more optimistic about the labour market as well, with the unemployment rate seen over the same period easing from 12.4% to 11.9%. After loosening in November, respondents’ expectations for access to credit remained unchanged overall.
Czech (real) retail sales ex motor vehicles dropped 0.7% m/m and 7.3% y/y in December, data from the Czech Statistical Office showed. For the whole year 2022, retail sales decreased 3.6%. The eighth year-over-year decline in a row was also bigger than the 5.5% expected. The decline was broad-based with food sales (-10.2% y/y) even recording the lowest value since the beginning of the survey. Non-food sales fell by 7.5% y/y with cultural & recreation goods (-4.8%), online shopping (-10.6%) and “other household equipment” (-11.4%) acting as the biggest drag. Sales in the automotive sector (including repairs) on the other rose 0.7% m/m (0.3% y/y). The Czech koruna strengthens slightly today, but that’s mainly due to the sell-off in core bonds (pushing yields higher) easing a bit today. EUR/CZK changes hands around 23.83.