In a session deprived of major eco data releases on both sides of the Atlantic, US and European bonds suffered further fall-through losses after yesterday’s late session U-turn on US markets. Over there, a poor 30-y Treasury auction highlighted that an easy investor pick-up of massive bond supply wasn’t as evident as markets were inclined to take for granted of late. In mainly technical trade, US yields are adding between 1 bps (2-y) and 5 bps (30-y). Headlines on Russia cutting its oil output by 500 000 barrels a day from next month maybe added to inflationary fears, further supporting core bond yields. Brent oil in a first reaction jumped from $ 84 p/b to almost $87 b/p, but the move is already partially reversed ($85.5). Even so, in a bear flattening move, German yields also gain between 5.5 bps (2-y) and 4.0 bps (30-y). Fore now, the rise in global core yields still only has a limited impact on intra-EMU government bond spreads (10-y spread Italy-Germany +2 bps). The combination of higher yields and some additional uncertainty on the oil market this time was a good enough reason for equity investors to reduce some exposure. Losses are substantial (EuroStoxx 50 -1.2%, Nasdaq -0.75%). For now, no key technical references have been broken, but the remarkable rally since the start of the year this week shows signs of fatigue. After finishing this report, in the US, consumer confidence of the U. of Michigan (including closely watched measures of consumer inflation expectations) still might affect trading going into the weekend.
On FX markets, risk-off sentiment reinstalled a better bid for the US dollar. Still the gains remain modest. DXY trades at 103.35. EUR/USD is at risk of slipping below the 1.07 big figure. The 1.0669 correction low is coming within reach. USD/JPY showed some wild intraday swings. The yen jumped from USD/JPY 131.50 to below 130 on headlines that the Japanese government will appoint Kazuo Ueda as successor of governor Kuroda as the next BOJ head. He is seen being less of a dove compared to deputy Governor Masayoshi Amamiya, who was seen in pole position for the job. However, Ueda in a first reaction indicated that current easy BOJ policy is appropriate and needs to be continued, for now. The yen reversed part of its early gain but at USD/JPY 130.75, the yen still outperforms the other majors, despite higher core (EMU & US) yields. Sterling again showed remarkable strength today. UK data this morning showed that the UK just avoided a technical recession with ‘growth’ at 0.0% after a 0.3% contraction in Q3. Whether this is something to be very happy about remains to be seen, especially as the monthly December GDP estimate (-0.5%) was weaker than expected. Still, sterling extended this week’s rebound, with EUR/GBP currently trading near 0.8835 (from 0.886).
News & Views
Hungarian inflation soared from 24.5% in December to 25.7% y/y (2.3% m/m) in January, more than expected. Core inflation sped up as well, to 25.4%. Services inflation was to blame for the upward surprise and with strong wage growth in the pipeline there may be no letup in the short run. Gas and electricity prices moderated thanks to the mild winter. Headline inflation could start to ease from February on thanks to base effects. The government’s decision whether or not to extend the price cap on some food products beyond April is a wildcard for the subsequent decline though. Provided the disinflationary process indeed started from this month on and on the condition that the Hungarian forint stays around current levels (EUR/HUF 390.30 currently, slightly weaker than at the open), we assume the central bank to cut the overnight deposit tender rate from 18% to 17% at the March meeting.
Czech inflation soared 6% m/m to be up 17.5% y/y in January. The sharp increase followed the government’s decision to discontinue the energy savings tariff for households and instead introducing a price cap. Core inflation eased further, to 12.3%, with both goods and services prices moderating. Today’s numbers were more than analysts expected but broadly in line with (even slightly lower than) the Czech National Bank’s winter forecasts. The CNB assumes the January acceleration in early 2023 to be temporary before decreasing rapidly to single digits in 2023H2 and close to the 2% target in the beginning of 2024 with a tight monetary policy stance (7% and to remain there for longer than markets expect, dixit governor Michl) contributing to the decline. The Czech koruna trades unchanged near its 2008 high of EUR/CZK 23.70.