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Money Markets Raised Fed Terminal Rate to 5.4%

Markets

Core bonds tumbled on Friday. US yields soared 4.5 to 12.7 bps with the front end underperforming. The 2y yield (+11.7 bps) took out the November cycle high (4.799%) to close the week at a new one (4.81%). The 10y variant (3.942%) tested recent highs in an attempt to take out the 3.947% resistance level (61.8% recovery on the Oct ’22-Jan ’23 correction). German rates’ advance was similar: 4.9 bps to 11.7 bps across the curve with the 2y tenor surpassing the 3% barrier for the first time since 2008 and the 10y (2.537 close) flirting with the previous cycle high at 2.57%. Bonds came under pressure soon in the European session, pressured by ECB’s Nagel hawkish comments on the sidelines of the G20 summit. Much stronger-than-expected US PCE deflators, spending and housing data accelerated the downfall. Bullard reiterated the case for moving quickly to shield the Fed’s credibility in a panel interview later on. Money markets meanwhile raised the terminal rate to 5.4%. Their base case is 3×25 bps but odds for a 50 bps March rate hike are slowly increasing. The sell-off in core bonds spilled over into equity markets. European stocks dropped almost 2% (EuroStoxx50, losing the ST upward sloping trend channel and 4197 support) while Wall Street fell between 1.02-1.69%. The dollar gained. DXY rose from 104.59 to 105.21. EUR/USD fell deeper sub 1.06 to 1.0548, eying support at 1.0479/84. USD/JPY tackled resistance from recent highs around 135 to close at 136.48. EUR/GBP quickly aborted a test of 0.88 as sentiment deteriorated. Yet damage remained limited thanks to surging yields in the UK too, settling eventually at around 0.883. The pound tried another comeback in early Asian dealings this morning. It’s probably inspired on rumours that UK PM Sunak will announce a post-Brexit settlement for Northern Ireland Monday afternoon, three years after the withdrawal agreement was made. The moody sentiment is capping sterling’s potential though. Other currencies including the dollar and the yen are better bid. In his second confirmation hearing before parliament today, BoJ-governor nominee Ueda stuck to the balanced approach followed on Friday. Japan’s 10y yield meanwhile continues to trade above the 0.5% cap. US/German core bonds trade with a slight easing bias, keeping yields close to the technical resistance levels mentioned above. The US dollar continues on Friday’s path too as European stock futures pared marginal gains going into the European open. Today’s economic calendar contains US durable goods orders and the EC’s economic confidence for the euro area. That may not be enough to force technical breaks in yields and the dollar (yet) with more important data due later this week (US ISM’s, European CPI).

News and views

New Zealand volume-based retail sales fell by 4% in Q4 2022 compared with Q4 2021. Decreased volumes of retail sales were seen in the hardware, building, and garden supplies industry, down 15%, and in the motor vehicles and parts industry, down 10%. COVID-19 restrictions have influenced changes in sales patterns in many retail industries over the last few years. Building supplies and vehicle sales fell, but are reflective of a decline in peak sales during lockdowns (Q4 2021). On the other hand, sales volumes grew in the hospitality sector, with food and beverage services up 14%, while accommodation services were up 28% (lifting of border restrictions). Adjusted for inflation, retail sales fell by 0.6% Q/Q (vs +0.2% expected) following an upwardly revised 0.6% Q/Q growth in Q3. In other local news, Reserve Bank of New Zealand chief economist Conway delivered a rather hawkish speech, warning that higher interest rates are still needed to cool the economy (cash rate 5.5% from the middle of the year; suggesting 3 consecutive 25 bps rate hikes from now). The kiwi dollar is unable to fight a strong greenback with NZD/USD losing the neckline of a double top formation at 0.62.

Poland’s largest oil company (PKN Orlen) has unexpectedly stopped receiving Russian oil via the Northern Druzhba pipeline. Russian oil accounts for about 10% of Polish supplies after the country for a large part switched to alternatives last year. It’s the country’s aim to redirect these final flows as well. Orlen said that consumers won’t be impacted by the halt. The Southern Druzhba pipeline, running through Ukraine, Hungary, Slovakia and the Czech Republic was operating normally.

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