A mixture of market moving elements pushed US yields down yesterday from earnings over disappointing data to the Fed. Earnings news was perhaps not so much related to the likes of Microsoft & Alphabet as it was to New York Community Bancorp. The regional US bank rekindled March 2023 bank collapse fears after setting aside a big pile of cash to buffer for commercial real estate loan risks. Disappointing eco data (ADP job growth & ECI) added to the intraday decline with the Fed policy meeting delivering the final blow. The policy as expected stayed unchanged but the statement swapped its hawkish bias for a more balanced one. Chair Powell in the press conference noted inflation is on a promising track and the labour market is getting more balanced but he wants further confirmation before deciding to cut rates. He deflected several questions that gauged for a specific trigger or a timing. The only thing he wanted to disclose is that a cut in March (which was given a 50-50 chance in the previous days) isn’t the base case. Other than a temporary yield spike, it sparked market speculation for a first move in May. Powell did mention an in-depth study on the balance sheet runoff in March, suggesting a tweak to the current $95bn pace. Yields at the front end of the curve declined up to 13.6 bps, eventually closing around the intraday lows it hit earlier on the day. Longer maturities fell between 8.3-12 bps with safe haven flows strengthening the downleg into the close. US stock indices gapped lower at the open (earnings) and suffered an additional blow from Powell’s March comment. The Nasdaq underperformed with 2.23% losses. The US regional bank story was the dominant story for German yields as well, although slower-than-expected French inflation and in-line German CPI didn’t help either. The German curve lost 9.1-11.3 bps across all maturities. Risk aversion supported the dollar against the euro but not the yen. EUR/USD fell from 1.0845 to 1.0818. USD/JPY eased below 147.
US economic data today includes weekly jobless claims and the manufacturing ISM ahead of the payrolls report tomorrow. They’ll need to confirm the idea of an economy too resilient for fast and a lot of rate cutting if we want to see yields building/holding on the minor gains of this morning. More NY Community Bancorp news stories obviously serves as the wild card via the general risk climate. The latter is still fragile in early European dealings, keeping the US dollar in pole position for now. EUR/USD is testing the 1.0793 support area. The pound traded strong over the past couple of weeks and is now looking to the Bank of England for further guidance. The recent uptick in UK CPI leaves the central bank basically little options but to stress the need for a tight enough monetary policy but it wouldn’t be the first time Bailey surprises. EUR/GBP is nearing critical technical levels at the lower bound of the sideways trading range.
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The president of Japanese labor union UA Zensen, Matsuura, wants to raise wages enough for the BoJ to be able to take policy steps to correct the yen’s depreciation which has gone too far. The 1.8mn retail/restaurant union plans to push pay gains above 6% in an effort to start a virtuous wage-price cycle. Japanese largest labour union, Rengo, earlier called for 5% or more. Initial results of wage negotiations are due on March 15 with the next BoJ policy meeting scheduled for March 19. The Japanese yen strengthened from USD/JPY 147.75 to the high 146-area though the move is more linked to global risk sentiment and lower core bond yields.
Polish President Duda triggered a new escalation between him and new PM Tusk by sending the 2024 budget for a top court review. That court is packed by judges picked by the previous Law & Justice party, too which Duda is closely linked. The President threatened to further obstruct policy making by sending all legislation passed by the government for review until two Law & Justice officials, accused of abuse of power but pardoned by the president, are reinstated as lawmakers. The Polish zloty isn’t affected yet by the political bickering with EUR/PLN holding close to multi-year best PLN-levels (EUR/PLN 4.33).