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Dollar and Euro Keep Each Other Balanced


The recent core bond yield recovery ran into resistance yesterday and that had knock-on effects on other markets. Equity markets in particular enjoyed a nice run. The EuroStoxx50 ended about 0.5% higher but that followed a 1% intraday rise. The tech-heavy Nasdaq on Wall Street posted 2% gains. As for yields, they finished 1-2.7 bps lower in the US. They were down as much as 8 bps earlier on the day though, hitting the low point in the wake of the NY Fed’s consumer inflation expectations survey. The one-year ahead gauge fell to a 3-year low of 3.01% while the three-year forward looking indicator eased from 3% to 2.62%. Other subsets point at relative confidence in the US labour market (mean probability of leaving a job voluntarily rises) but the proportion expecting to miss out on a debt payment rose towards the previous post-pandemic high. German Bund yields missed out on the US bottoming out process that followed but finished no more than 3 bps lower. Addressing the economic outlook, Fed’s Bostic said inflation has eased more than expected but added he is comfortable with the current restrictive stance. He repeated his call for only 50 bps of rate reductions this year, starting in Q3. Lowering the pace of QT is an open question, Bostic added. And according to Fed’s Bowman, we’re not at the point yet where rate cuts are appropriate. Instead she warned that easing financial conditions – as seen in November and December – risk fueling inflation. The dollar lagged major peers with minor gains for EUR/USD (to 1.0950) & losses for the DXY (102.20) and USD/JPY (144.23). Sterling was once again among the better performers. It broke sub EUR/GBP 0.86 support. Norway’s krone underperformed on sliding oil prices (-3.5% for Brent). The Saudi’s cutting prices sharply for its Middle Eastern supplies underscored tepid physical demand, including (and perhaps especially) in China. Turning to Asian dealings this morning, Japan reopens after a long weekend. Bond yields ease a few bps. Tokyo inflation for December matched expectations almost perfectly. Headline prices rose 2.4% while core gauges came in at 2.1% (ex. fresh food) and 3.5% (ex. fresh food & energy). All of them marked a slight deceleration from the November readings. Initial yen gains after the BoJ indicated a cut in monthly long-term bond purchases were pared in the meantime. The dollar and euro keep each other balanced in a quiet trading session. Unfortunately, the economic calendar today again has not that much to offer. We do keep a close eye at the start of the US’ monthly refinancing with a $52bn 3-year auction. Belgium’s 10-y OLO benchmark syndication as well as Italy’s 7-y launch further add to the typical January wall of bond supply, which we in general consider to be an important driver for yields going forward but perhaps also today. We assume their downside nevertheless is well protected after the recent decline. EUR/USD for the time being remains a technical/risk sentiment trade without a clear direction.

News & Views

The British Retail Consortium (BRC) published its December retail sales monitor. Many retailers faced a disappointing December with sales growth only up 1.7% on 2022. The festive period failed to make amends for a challenging year of sluggish retail sales growth, as weak consumer confidence continued to hold back spending. Households remain cautious about making larger purchases. BRC CEO Dickinson warns that 2024 looks to be another challenging year for retailers and their customers and spending will continue to be constrained by high living costs. The rise to business rates this April is another big challenge.

The speaker of Slovak parliament and leader of the Hlas-party which joined the Smer-led coalition under PM Fico after October elections last year, Peter Pelligrini, said that he would formally announce his candidacy to run for president on January 19. Presidential elections will be held on March 23 with a potential second round on April 6 if none of the candidates gets an absolute majority. A Pelligrini victory would cement the recent (eurosceptic) power shift as the Slovak president holds more than a symbolic role. The current pro-European Slovak president, Caputova unexpectedly called new presidential elections for personal reasons.

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