Markets
Chances had already become quite slim and Friday’s US eco data rubberstamped markets’ feeling that the Fed has good reason to wait for clearer directional evidence that the economy is weakening and/or is inflation is moving decisively closer to target before further easing policy. Indeed, US December payrolls with monthly job growth at 50k (vs 70k expected) was no ‘grand cru’. However, with the unemployment rate easing from 4.5% to 4.4%, it only confirms the ‘low-hiring, low firing’ pattern that already reigns on the US labour market for quite some time. Average hourly earnings at 0.3% M/M and 3.8% Y/Y even were marginally higher than expected. Later in the session, consumer confidence of the University of Michigan also printed slightly stronger than expected (54 vs 52.9) with inflation expectations indicators (4.2% at 1-y and 3.4% for the 5 & 10-y sector) still printing uncomfortably high. Markets now have fully prices out an end January Fed rate cut. A next fine-tuning move now is only fully discounted for the June meeting. The US yield curve logically flattened with the 2-y adding 4.4 bps as the 30-y yield ceded 2.5 bps. German yields only changed 1 bps (at best). Markets on Friday also looked out at the opinion/ruling of the of the Supreme Court on the IEEPA US trade tariffs, but the judgment was delayed, maybe until this week. Equity markets at least could live with the Fed likely taking a balanced approach on further easing. US indices added between 0.48% (Dow) and 0.81 % (Nasdaq). The Eurostoxx 50 even remain on record path (+1.58%). The dollar retained its advantage over other majors. DXY closed a solid start to the new year at 99.13. EUR/USD dropped to close to week at 1.1637 (to be compared with a 1.1746 open on Jan 2).
The week after the payrolls usually brings some data poverty. US CPI data tomorrow and retail sales (Wed.) still are worth looking at but likely won’t change markets assessment on Fed policy. However, the lack of data drivers might be compensated for by multiple event risks that resurfaced or intensified during the weekend. Overnight, Fed Chair Powell said that the US central bank was served with grand jury subpoenas, related to Powell’s testimony and the renovations of the Fed headquarters. However, the Fed Chair clearly indicated that the move ‘should be seen in the broader context of the administration’s threats and ongoing pressure’. The Fed Chair’s forceful reaction marks a clear escalation in the fight on central bank independency. In a first reaction US risk premia understandably are rising. The 30-y US Treasury yield adds 3.5 bps. US equity futures are ceding 0.5%+. The dollar is falling prey to a reversal after recent gains. EUR/USD rebounds to the 1.167 area. Also keep an eye at other (geo)political event risk including to the US reaction on the tensions in Iran and the still pending ruling of the US Supreme Court on tariffs. Especially the fight on Fed independence will be highly debated on the financial newswires. In a first reaction it might put some further pressure on US assets, including the dollar. Still we are cautions to already draw firm, directional conclusions based on current ‘headlines’. The auction of US 3-y and 10-y paper this evening in this respect might be a good pointer of appetite for US assets as the Fed independency debate lingers.
News & Views
Rumours are swirling in Japan that PM Takaichi will call for snap elections. The co-leader of junior coalition party Ishin yesterday hinted at that when saying he felt “we have shifted to a new stage now” after talking with Takaichi. The biggest opposition party after the Sunday quote said they are now in election mode. Takaichi’s LDP under her predecessor Ishiba lost its majority in both houses of parliament. It now has a razor-thin one in the powerful lower house thanks to Ishin and the support of three independent lawmakers. Takaichi is polling high and is rumoured to announce the dissolution of the lower house as soon as January 23. Japanese markets are closed today in observance of Coming-of-age Day but it is expected that snap elections may lift (longer-term) bond yields through rising fiscal risk premia.
US President Trump is demanding credit-card companies to cap interest rates at 10%, drastically down of the 20%+ in recent years. Lenders argue that such rates are to compensate for the lack of collateral when borrowers default and warn the rates cap could result in reduced credit availability. Trump has set January 20 as a deadline for companies to comply, adding that they would be “in violation of the law” if they didn’t. POTUS’ move follows instructions last week for government-sponsored enterprises Fannie Mae and Freddie Mac to purchase $200bn in mortgage bonds, aimed at driving down mortgage rates.
