A busy eco calendar provided some distraction in the run-up to tonight’s FOMC gathering. French January CPI slowed more than forecast in January (-0.2% M/M & 3.4% Y/Y), balancing yesterday’s upward Spanish surprise. German Bunds immediately attempted to gain some momentum, but the move didn’t go that far. German inflation printed as expected at -0.2% M/M with the Y/Y-figure at 3.1% (from 3.8% vs 3.2% expected). National data released so far suggests that aggregate EMU CPI data will tomorrow barely deviate from consensus (-0.4% M/M & 2.7% Y/Y). US Treasuries equally attempted some kind of rally after payrolls processor ADP reported a 107k net job increase for January where markets banked on 150k new jobs. The employment cost index also slowed from 1.1% Q/Q in Q3 to 0.9% Q/Q (vs 1% expected). Data and the soft stock market opening (-1.3% for Nasdaq on earning misses; see graph) push US yields more than 10 bps lower at the front end of the curve, pulling German yields down in the process. EUR/USD rises towards 1.0880 on yield differences. Together with the early US data, the US Treasury announced its quarterly refunding statement. Since August 2023, Treasury has significantly increased issuance sizes. It intends to do so a final time this quarter and believes that the cumulative changes will then leave the US Treasury well positioned to address potential changes to the fiscal outlook. Auction sizes of the 2-yr and 5-yr will be increased by $3bn/month, the 3-yr by $2bn/month and the 7-yr by $1bn/month. The 10-yr and 30-yr will respectively see a $2bn and a $1bn increase for both new issue and reopening with the 20-yr tenor the only one being unchanged. These increases were more or less in line with WS expectations.
The Fed will keep its policy rate unchanged tonight. Back in December, FOMC projections suggested a cumulative 75 bps of rate cuts this year, but Fed Chair Powell didn’t push back against more aggressive market bets at that time. One month and a half onwards, markets are banking on an even steeper path lower with a cumulative 150 bps of rate cuts discounted by the end of the year and the probability of a March cut at 50%. This time we might see Powell being a little more vocal in obstructing that given the outperforming US economy and looser financial conditions. A risk factor is if the Fed plays the “real interest rate” card, aiming to keep that benchmark level as the disinflation process continues. The debate about tapering QT (currently $95b/month) could serve as a lightning rod. Discussing and deciding over QT first buys the central bank some time before moving on to rate cuts. If successful and markets do pare some of the excessive bets, we may see a modest, and likely temporary, yield advance. If US data later this week (payrolls, ISM) underscore the message, there is potential for something more.
News & Views
In an interview with Reuters, Czech National Bank Deputy Governor Jan Frait indicated that he is prepared to support a 50 bps rate cut at next week’s CNB policy meeting. Even a larger cut might be discussed next week. Frait assessed that the annual price mark-ups for goods and services at the start of the year didn’t bring any shocks while at the same time the outlook for growth, household demand and inflation pressures was softening. Frait indicated that he favors more bold steps at the beginning (of the easing cycle) to bring the policy rate to levels that then need finetuning. Frait also expects the quarterly economic update to show a softer economic and inflation outlook. The Czech 2-yr swap rate tumbled 15 bps (4.07%) reaching the lowest level since the CNB stopped raising the policy rate. The krone at EUR/CZK 25.86, is nearing the lowest level since May 2022.
Polish annual GDP growth slowed to 0.2% in 2023, compared to 5.3% growth in 2022 (vs 0.5% consensus). First partial data indicate that gross added value in the industry declined 0.7%. Trade and repair was 2.4% below the level of last year while construction activity grew by 3.4%. In terms of spending, consumptions fell slightly (-0.1%). Gross fixed capital formation was 8% higher compared to the previous year. Softer than expected growth data come as the National Bank of Poland halted its rate cut cycle after a cumulative 100 bps of cuts in October and November. The NBP currently has put further easing on hold as it assesses the impact of fiscal policy of the new government on inflation. At EUR/PLN 4.33 the zloty is holding strong, keeping the December top at 4.2935 within reach.