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Several Interest Rates, Both in US and EMU Testing or Nearing Top of Sideways Range


Since last week’s Fed meeting, the combination of Fed speak and strong US data squeezed investors out of early easing bets and this move simply continued yesterday. The CBS 60 Minutes interview with Fed Chair Powell on Sunday (off script indication of first cut in June?) still resonated. Minneapolis Fed Kashkari reinforced Powell’s message that the Fed shouldn’t be in a hurry to cut rates. To validate this view, he indicated that the neutral policy rate may have increased post-pandemic. This makes current rates less restrictive and gives the Fed time to assess incoming data with less risk of derailing the economy due to overtightening. A few hours later, the incoming data pointed in the same direction. The unexpected setback of the US services ISM in December only proved to be an outlier. The headline index jumped decisively in expansion territory (53.4 from 50.5). New orders (55) are boding well for future activity. Employment also returns north of 50 (50.5). The prices paid index jumped sharply from 56.7 to 64.0. This doesn’t help the Fed to feel more confident that inflation is sustainably returning to 2%. US yields jumped between 13.8 bps (10-y) and 10.8 bps (2-y). Markets further reduced expectations for a May rate cut to <80%. German yields lagged the US but also added between 8.1 bps (30-y) and 4.4 bps 2-y. Several interest rates, both in the US and EMU are testing (ST yields) or nearing (longer maturities) the top of the sideways range that guided trading post the December FOMC meeting (US 2-y 4.50% area, 10-y 4.25% area; EMU 2-y swap 3.05/3.1% area, 10-y swap 2.75/2.77% area). US equities stalled after setting now top levels last week, but the damage was modest (S&P 500 -0.32%). The dollar outperformed. DXY closed above the 104/104.26 resistance. If confirmed, this improves the technical picture. Still, the picture isn’t unequivocal. EUR/USD briefly touched the 1.0724 (Dec low), but in the end, the 1.0712/24 area survived. USD/JPY tested he 148.8 resistance, but a clear break also didn’t occur yet.

This morning, Chinese equities (CSI 300 +3.0%) are rebounding as markets see more signs that authorities are stepping up efforts address the recent sell-off. Other Asian markets trade mixed to slightly lower on receding Fed rate cut expectations. US yields return a few bps on the recent rally. The dollar stabilizes. Later today, there are no important US data, but the Treasury will start its monthly refinancing with the sale of $ 54bln 3-year notes. In Europe, the ECB consumer expectations are worth keeping an eye on. Regarding markets, we look out whether interest rate markets can hold the recent rise or even take out the above-mentioned resistance levels without additional data evidence. Maybe some consolidation might kick in. Similarly, can the dollar take out nearby resistance as the rise in yields slows? For EUR/USD a less buoyant equity market or persistent euro weakness still might do the job.

News & Views

The Reserve Bank of Australia struck a slightly more hawkish tone than expected at its February policy meeting. It kept the rates steady at 4.35%, as expected, but highlighted lingering inflation risks, especially coming from the services sector. Prices in the latter eased more gradually than expected in November, contrasting developments in the goods area. This is in part due to a labour market tighter than what is consistent with sustained full employment and inflation at target, despite conditions having eased further. Both headline and core CPI in Q4 last year dropped more than the RBA foresaw but governor Bullock at the presser pushed back against those calling the November rate hike a mistake. Instead, both she and the RBA statement explicitly kept the option open for further tightening if needed. The twist comes even as GDP and CPI forecasts were revised down a little over the horizon. But inflation isn’t expected to reach the midpoint of the 2-3% target before 2026 though. Money markets stick to their pricing of a first cut by August. Australian swap yields spiked higher but forfeited gains shortly after. The Aussie dollar retains gains against an overall weaker USD this morning. AUD/USD rises towards 0.6508.

Total retail sales in January rose 1.2% y/y in January, the British Retail Consortium revealed this morning. A measure targeting same stores rose by 1.4%. Both represent a further easing from the festive period in November and December. As they are unadjusted for inflation, the slower pace along with tepid consumer demand also reflects easing price pressures. The BRC CEO noted that “Sales of big-ticket items such as furniture and household and electrical appliances remained poor” while food sales were a positive as British households stayed at home during two winter storms.

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