The unexpected slowing in German inflation, however difficult the numbers are to interpret, determined much of the trading session yesterday. European rates fell with German bund yields printing losses between 2.5 bps (2y) to 6.2 bps (30y) still. US bond yields dropped in the slipstream. The long end outperformed, causing the 10y2y spread at some point to hit a new multidecade extreme. Enter the 30y $21bn auction. After a strong 3y and outright stellar 10y bond sale the days before, few expected difficulties for the one yesterday. Yet, the auction tailed by about 3 bps, primary dealer award was the highest in nearly a year and the bid-cover ratio was lower than the average for the past six auctions. It triggered a sudden and sharp sell-off in US Treasuries, especially at longer maturities (intraday moves of >10 bps). The US yield curve eventually added 5.6 bps (30y) to 7.1 bps (5y). Equity markets in Europe finished about 1% higher (Euro Stoxx 50). Wall Street’s green opening was followed immediately by a protracted decline, leading to losses of 1% in the likes of the Nasdaq. That offered relief to the greenback. EUR/USD pared much of its earlier gains to close only marginally higher at 1.074 (from 1.071). The trade-weighted DXY clawed back above 102.99 (pandemic 2020 support) to finish at 103.22. Sterling traders were stoic about BoE governor Bailey’s (and Pill’s, Haskel’s and others) appearance before parliament yesterday. Risk-on pushed EUR/GBP temporarily below 0.885. This technical support area survived but remains at risk.
Chinese CPI accelerated from 1.8% to 2.1% in January. Services inflation rose 1%, increasing from 0.6% in December. The pick-up was expected given the demand rebound around Lunar New Year. Factory gate inflation (PPI) is still negative though, at -0.8% y/y (from -0.7%). The yuan doesn’t profit against a generally stronger USD. USD/CNY tests 6.80 resistance. EUR/USD loses a few ticks and DXY holds near yesterday’s closing levels. Core bonds trade sideways and we fear that that may not change a lot today. The eco calendar only contains the U. of Michigan consumer confidence which also publishes inflation expectations for the short and medium term. Barring a large surprise, we don’t expect much of a market reaction with investors likely to refrain from taking major positions ahead next week’s US inflation numbers. Dollar performance just as in the previous days is likely to be determined by equity sentiment. Stock futures point to a marginally lower opening in Europe and the US. UK GDP Q4 GDP this morning as expected printed at no change (vs -0.3% in Q3). Sterling is losing a few ticks post the release (EUR/GBP 0.887).
The Central Bank of Mexico (Banxico) yesterday delivered a surprise 50 bps rate hike, bringing the policy rate to 11.00%. Analysts expected the Bank of slow the pace to 25 bps. The Bank saw the economy growing in Q4 2022, but it lost momentum. January headline inflation increased to 7.91% Y/Y, but especially core inflation which the bank sees as more accurately reflecting the inflation trend, surprised on the upside (8.45%), a.o. due to a rebound in services prices. Inflation expectations for 2023 and 2024 were upwardly revised. Inflation is now only expected to converge to the 3.0% target in the final quarter of 2024 (3.1%), with upside risks to the outlook. Especially higher than expected core inflation caused the Bank to opt for an additional step of 50 bps. Depending on incoming data, for its next policy meeting, the upward adjustment to the reference rate could be of lower magnitude. The Mexican peso after the decision strengthened from USD/MXN 18,95 to close near 18.77.
In the quarterly monetary policy report released this morning, the Reserve Bank of Australia raised its forecasts for inflation. Inflation in Q4 of 2022 remained high and broad-based (headline 7.8%, trimmed mean at 6.9%). Even as inflation is expected to have peak, it remains too high. The RBA now forecasts the trimmed mean inflation to be at 6.25% in June (from 5.5%), 4.25% in December 2023 (from 3.25%) and only to return to 3.0% and still to stay at the 3.0% upper bound of the 2-3% band end 2024 and 2025. Wage growth is expected to climb to 4.25% this year. Amongst others, the risk remains of a tight labour market fueling wage costs and prices rises in the services sector. The RBA sees 1.5% GDP growth in 2023 and 2024 after 2.75% growth in 2022. The path of the expected unemployment rate was kept unchanged (3.5% and Dec 2022, 3.75% end 2023 and 4.25% end 2024). The RBA raised its policy rate by 25 bps earlier this week and changed its guidance to more tightening to come. The Aussie dollar today trades little changed at AUD/USD 0.6925.