Paralysis Struck Equity, FI and FX Markets

Markets

Paralysis struck equity, FI and FX markets yesterday. Stocks hovered near their record highs, posting small losses in Europe and printing mixed in the US (tech slightly down, industrials up). Core bond yields’ recent corrective move lower grinded to a halt by recouping a technically insignificant 0.5-2 bps both in the US and Europe. The limited data available, if anything, supported this modest recovery. Aside from higher but still-low US weekly jobless claims, a surge in German factory orders is worth the mention. That was driven by large-scale (government) orders in the defense-related pockets (finally one may say) but even when excluding those, the German statistics agency noted an improvement. Actual production for November published this morning also surprised to the upside with an unexpected 0.8% m/m increase. Gilts outperformed with front end yields still easing some 2 bps. The US dollar held the advantage against most of its advanced counterparts. The greenback simply extended a mid-December upleg rather than actually responding to news. EUR/USD slid to 1.166 with the slide continuing this morning to 1.165, the lowest in a month but still some distance away from first meaningful support at 1.1392. DXY is currently testing the 99 big figure while USD/JPY after a calm day yesterday takes a leap today. Currently trading at 157.4 the Nov-Dec highs just shy of 158 are closing in fast.

We’ll get more fireworks today, hopefully. Some housing data, the University of Michigan consumer confidence indicator and most importantly, US December payrolls are scheduled for release. Consensus expects job growth to come in at 70k, picking up slightly from November’s 64k. The unemployment rate would ease to 4.5% from the four year high of 4.6%. We think it’ll take a major downside surprise – which is not our base scenario – for markets to meaningfully change their status quo expectations for the January Fed policy meeting, especially because earlier data this week wasn’t that bad at all (eg. services ISM). Numbers in line or perhaps a bit stronger (employment component in services ISM) would extend the dollar’s current momentum and lift (short-term) US yields further away from their recent lows/support zones but unlikely have technical implications. Another potentially big event risk is concentrated at the Supreme Court today. It’ll issue an opinion on Trump’s reciprocal tariffs that may or may not result in actual rulings to either keep them in place or strike them down. The latter would undoubtedly introduce new uncertainty: What will happen to the current trade deals? What other tariff routes are there for the US government? How quickly can these get implemented and how different are the tariff rates going to be? Rising risk premia would probably lift long-term US bond rates but the jury remains out whether and how it’ll affect other US asset classes (equities, the dollar) as well.

News & Views

The NY Fed’s December survey of consumer expectations showed labor market expectations worsening. The mean perceived probability of finding a job if one’s current job were lost fell by 4.2 ppts to 43.1%, reaching a new series low. The mean perceived probability of losing one’s job in the next twelve months increased by 1.4 ppts to 15.2%. The reading is above the series’ 12-month trailing average of 14.3%. Median inflation expectations increased from 3.2% to 3.42% at the 1-year horizon, the highest level since April of last year. They were unchanged at the 3-yr and 5-yr horizons, both at 3%. Households’ perceptions about their current financial situation compared to a year ago and year-ahead expectations both improved.

In an effort to restoring US housing affordability, US president Trump wants government-sponsored enterprises (GSE) Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) to step up purchases of mortgages from lenders by the tune of $200bn. The GSE’s convert them into MBS. The bond buying programme should help squeeze credit risk premia, that way driving mortgages rates and monthly payments down. The average rate on a 30-yr mortgage in the US is currently 6.16%. Trump’s latest initiative follows a ban earlier this week for institutional investors to buy single-family homes.