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The Dow Jones 30 inches higher as bond yields pull back from their recent highs. A bounce off December’s low of 32500 and above 33000 has prompted short-term sellers to cover, turning the latter into a fresh support. As the RSI returns to the neutral area, follow-up buying could be expected from those who missed the initial pop. The index has recouped half of the losses from the mid-February tumble and 33800 is a key hurdle to clear before the bulls could hope for a sustained recovery towards the recent peak of 34500.

The New Zealand dollar softened after traders were underwhelmed by China's 5% growth target. On the daily chart, the kiwi came under pressure at 0.6280 on the 20-day SMA following its break below the January low of 0.6200. On the hourly time frame, 0.6160 at the base of the latest bullish momentum is an important support to gauge the strength of buying interest, and a bearish breakout would confirm a lack of it. Then 0.6070 would be the next stop on the way down with 0.6230 as a fresh resistance.

The US dollar retreats as the market awaits Fed Chair Jerome Powell’s testimony before Congress. A break above the first resistance of 1.0640 eased some of the downward pressure. Then the bulls managed to lift offers in the supply zone of 1.0690 from a previously faded rebound, opening the door for an extension to the previous spike at 1.0760. 1.0620 is a fresh support should the single currency need to consolidate its gains. 1.0550 is key in keeping the current bounce valid or a new round of sell-off could be triggered.

Markets

There was every reason to expect a calm session yesterday with Friday’s correction/consolidation on yield markets to continue into today’s appearance of Fed Powell before Congress. Eco data were few and second tier. However, calm was fiercely disturbed around noon. After ECB’s Wunsch on Friday, ECB’s Holzmann came up with some ‘out-of-the-box’ thinking on the ECB policy path. He advocated that the ECB might have to raise rates by 50 bps not only in March, but also in May, June and July. He considers that only 4.0% + levels will bring policy in a restrictive stance that will be effective enough to slow growth/demand and to bring (core) inflation down in a sustainable way. Holzmann’s view for sure isn’t the consensus. Yesterday, ECB’s lane and ‘dovish’ Portuguese member Centeno advocated a cautious, data-dependent approach. But it illustrates the lines along which the debate at next week’s meeting will evolve. European short-term yields made a sharp intraday U-turn. German yields closed between 10.1 bps (2-y) and 0.1 bp (30-y) higher. US yields lagged the sharp move in Europe. Even so, initial gains (in bonds) also crumbled and US yield closed between 0.5 and 3 bps higher. The impact of the yield rebound on other markets was modest. Even so, it capped further equity gains. The Euro Stoxx 50 closed 0.44% higher. US indices finished little changed. The jump in EMU yields this time also propelled the euro. EUR/USD closed at 1.0681 (from 1.0632). Euro strength also pushed EUR/GBP higher in the established range (close 0.8882). The likes of USD/JPY showed no clear directional trend (close marginally lower at 135.95).

This morning, Asian equities are trading mixed (Nikkei +0.22%, CSI 300 -1.28%). US Treasuries and the dollar are trading little changed with markets counting down to the appearance of Fed Chair Powell before the Senate later today. We expect the Fed Chair to reiterate that rates will have to be raised at least in line with the December dots. However, he might not be too specific with payrolls and CPI still to be released before the March 22 meeting. Such a ‘guarded’ hawkish stance might extend some further ST consolidation in US bond markets. A sustained break of the US 10-y above 4% probably has to come from the data (or auctions of LT US bonds this week) rather than from Powell’s guidance. Such a scenario also won’t help the dollar short-term. First importance resistance in EUR/USD (1.0803) is still some distance away. So, the technical picture shouldn’t change in a profound way.

News Headlines

Australia’s central bank (RBA) hiked policy rates by 25 bps to 3.6% this morning. It acknowledged the fact that inflation probably has peaked and should decline this year and the next to be around 3% in mid-2025. The RBA notes some divergence between decelerating goods price inflation and still-high services inflation. Household consumption adds to the latter but is nevertheless slowing due to tighter financial conditions and a softened housing outlook. In contrast, the business investment outlook is positive. The labor market remains strong and wage growth continues to pick up. The RBA does note that recent data suggest a lower risk of a wage-price spiral. Given elevated inflation and the additional economic cost it would take should this become entrenched in people’s expectations, the RBA thinks more monetary tightening is necessary. This time around however, the central bank introduced the possibility of a pause first instead of hiking back-to-back. This new element of timing dominated the market reaction. Australian money markets have largely priced out an April rate hike and have lowered the peak rate expectations from 4.15% to 4%. Swap yields in the region drop 5.8-14 bps with the front outperforming. The Aussie dollar retreats from AUD/USD 0.675 ahead of the decision to 0.67 currently. This level acts as important support.

Chinese exports dropped 6.8% in the first two months of 2023 from a year earlier. The biggest drag came from equipment used for data processing along with LCD displays and integrated circuits. Exports are expected to face continued downside pressures as global demand/trade weakens. The country also announced a more domestically focused approach yesterday, suggesting that exports lose significance as the economic stronghold. Imports on the other hand fell a stronger 10.2% over the same period, bringing about a trade surplus of $117bn. Weighing on imports were semiconductor parts and steel products. This contrasted with a jump in purchases of coal, rare earths and edible oil. China’s yuan trades subdued this morning. USD/CNY hovers around 6.936 opening levels.

The week started with worries that China setting its growth target to 5%, a meagre target for a post-pandemic kick-off, could mean a slower global growth ahead.

Today, the latest, and mixed trade figures further raised a couple of eyebrows regarding whether we are expecting too much from China. The decline in Chinese exports was less dramatic than expected, but imports fell more than 10% in February from a year ago.

Nasdaq’s Golden China Dragon index kicked off the week down, while the S&P500 was better bid at the open, with gains up to 1%. But the gains melted to the close and all three major US indices closed Monday’s session flat to very slightly positive. Still the S&P500 is heading to Powell’s semi-annual testimony above the 4000 mark.

Today, all eyes and all ears are on Federal Reserve (Fed) Chair Jerome Powell and what he thinks about the latest set of economic data.

Since the latest FOMC meeting, we saw a blowout NFP number, an uptick in inflation figures, lower-than-expected decline in the S&P500 earnings, and overall encouraging economic activity data.

And that’s a problem. The fact that the US jobs market, or economic activity don’t react to higher Fed rates is a problem for Fed, because it makes the Fed’s arms less efficient for fighting against inflation. Many would argue that changes in rates take time to filter into the economy but the Fed’s tightening campaign began in November 2021 - 17 months ago, the rate hikes began roughly a year ago. It’s about time we start seeing the impact of higher rates through data.

Alas, half-a-million NFP read, with the lowest unemployment rate of the past half a decade and uptick in inflation are indeed worrying.

US Crude above 100-DMA

Disenchanting growth target from China was expected to keep the oil bears in charge of the market, but the 100-DMA got surprisingly cleared to the upside yesterday.

Warning of tight global supply and rising Chinese demand from CERAWeek conference and Estonian foreign minister’s idea that the EU should halve the Russian oil cap helped pushing the price of a barrel above the critical 100-DMA level.

Tight global supply, war, sanctions on Russia oil and the rising Chinese and global demand tilt the balance for higher oil prices in the medium run. But higher energy prices mean higher inflation, and higher inflation means tighter monetary policies which, in return, increase the global recession odds, and could weigh on oil prices.

Elsewhere

The Reserve Bank of Australia (RBA) raised the rates by 25bp as expected and said that there could be more rate hikes on the pipeline depending on the data, but the AUDUSD slipped below 67 cents.

The EURUSD extended gains and flirted with the 1.07 mark yesterday on the back of a surprisingly softer US dollar into Powell’s testimony.

Gold sold off into the $1860 mark.

Hawkish Powell could reverse losses in the dollar later today.

Market movers today

German factory orders will reveal if manufacturing activity rebounded in January, after slumping at the end of last year.

Fed chair Powell will present his semi-annual Monetary Policy Report to the Senate Banking Committee. Ahead of the February jobs report on Friday, he will probably try to strike a balance between highlighting progress in slowing inflation without job losses, while also noting that peak rates have not yet been reached while inflation risks remain skewed to the upside.

Sweden's Riksbank Governor Thedéen speaks on the current economic situation.

In Denmark and Norway industrial production for January is on the agenda.

The 60 second overview

Markets: It has been fairly quiet overnight. Chinese equities have been supported by comments from the general manager of the Shanghai Stock Exchange that state-owned enterprises need better access to funding. Otherwise most other equity indices and futures are trading only marginally in green. US yields are slightly lower, EUR/USD remains just south of 1.07 and commodities remain little changed.

Reserve Bank of Australia: This morning RBA hiked the cash rate by 25bp to 3.6% in a decision widely anticipated in markets. Meanwhile, RBA's accompanied message to markets was slightly to the dovish side with Governor Lowe emphasising a heightened focus on incoming data in deciding "when and how much further" rates need to be hiked. Also, Lowe's comments on recent data releases suggested much less concern as to the topside risk to inflation. Markets reacted by pricing in a slightly lower peak in policy rates around 4.0% (from 4.1%) which also weighed on the AUD currency in the magnitude of roughly 0.5%.

Oil prices. Yesterday Brent Crude rose to around the USD86/bbl level and hence continued the trend higher from the last week. In the big picture oil prices remain range bound with little breaking news to break out of the range. Recent good news on the world economy has not caught the attention of the oil market either. We still forecast Brent to trade in the USD80-90/bbl range this year.

Euro Area retail sales: Despite the weakness in December, euro area retail spending still had a muted start to the year. Real retail sales were up 0.3% m/m in January (-2.3% y/y), on the back of stronger food spending, but the downtrend continued for other goods. Despite the ongoing recovery in consumer confidence, it seems private consumption is unlikely to return as a major growth driver in Q1.

Switzerland. Swiss CPI for February surprised sharply to the upside printing 3.4% y/y (consensus: 3.1%, prior: 3.3%). Likewise, core inflation ticked higher at 2.4% y/y up from 2.2% in January. CHF initially rose considerably, but ended up erasing the gains during the afternoon. The higher than expected inflation print further underpins our long-held view that inflation has not come sufficiently down for the Swiss National Bank (SNB) to conclude its hiking cycle or allow a significant depreciation of the Swiss Franc. We continue to expect the SNB to hike 25bp at its next week meeting in March with upside risk to our call.

FI: It was again a dramatic day in the global fixed income markets. It started with a solid decline in bond yields and interest rates, but at the end of the day, the 10Y German government bond yield had risen 10bp and 10Y Treasuries had risen some 5-6bp from the lows on Monday. The only markets where yields were not rising were Sweden and Norway. Furthermore, Denmark only saw a modest rise relative to Germany. The 10Y spread between Norway and Germany is now testing 50bp, while the 2Y spread between Norway and Finland is at 25bp.

FX: Broad EUR appreciation yesterday though EUR/USD remains below 1.07 ahead of Jerome Powell's Congressional testimony at 16:00. Weak Scandies continue. EUR/NOK took another big leap and is now testing year highs at 11.15. EUR/SEK approaching 11.20 resistance area ahead speech by Erik Thedéen at 08:30, a potential market mover.

Credit: Very strong primary activity kicked off the week in the corporate bond market. A wide range of companies announced new issues. In the Nordics most notably Vestas Wind Systems A/S announced intentions to launch a new EUR500m Sustainability-Linked bond while Neste Oyj announced intentions to launch a EUR6y and a EUR10y Green Senior unsecured bond. Overall, the positive market sentiment continued in the secondary market with iTraxx Main 2bp tighter at 74bp while iTraxx X-over tightened 11bp to 385bp.

Nordic macro

In Sweden, we will get the monthly budget balance from the Swedish National Debt Office (SNDO). The SNDO's two week old forecast suggests a surplus of SEK58.7bn for February. This is a seasonal quite normal figure for February, but we also note that electricity support package has started to be paid out since Feb 20 which might generate some uncertainty around this number.

Riksbank governor Erik Thedéen will speak on the topic "The situation in the economy" at 8.30 CET. The speech will not be published but media is invited so look out for news flashes.

Daily Pivots: (S1) 1.0638; (P) 1.0667; (R1) 1.0711; More...

Breach of 1.0690 minor resistance suggests that rebound from 1.0532 is resuming. The development revives the case that correction from 1.1032 has completed at 1.0532 already. Intraday bias is back on the upside for 1.0803 resistance first. On the downside, however, break of 1.0575 support will dampen this bullish view again and turn bias back to the downside.

In the bigger picture, as long as 1.0482 support holds, rise from 0.9534 (2022 low) should continue to 61.8% retracement of 1.2348 (2021 high) to 0.9534 at 1.1273. However, sustained break of 1.0482 will bring deeper fall to 61.8% retracement of 0.9534 to 1.1032 at 1.0106, even as a corrective pull back.

Daily Pivots: (S1) 1.1996; (P) 1.2023; (R1) 1.2052; More...

Range trading continues in GBP/USD and intraday bias remains neutral. On the downside, break of 1.1914 will resume the decline from 1.2446, as the third leg of the corrective pattern from 1.2445, for 1.1840 support and possibly below. On the upside, break of 1.2142 resistance will turn bias back to the upside for further rebound to 1.2269 and above.

In the bigger picture, as long as 1.1840 support holds, rise from 1.0351 medium term bottom (2022 low) should still continue to 61.8% retracement of 1.4248 (2021 high) to 1.0351 at 1.2759. However, decisive break of 1.1840 will complete a double top pattern (1.2445, 1.2446) after rejection by 55 week EMA (now at 1.2243). Deeper decline should be seen back to 38.2% retracement of 1.0351 to 1.2445 at 1.1645.

Daily Pivots: (S1) 0.9286; (P) 0.9330; (R1) 0.9353; More...

Intraday bias remains on the downside for USD/CHF. As noted before, corrective rebound from 0.9058 could have completed ahead of 38.2% retracement of 1.0146 to 0.9058 at 0.9474. Sustained break of 0.9289 resistance turned support will pave the way to retest 0.9058 low. On the upside, above 0.9358 minor resistance will turn intraday bias neutral and bring consolidations first, before another decline.

In the bigger picture, decline from 1.0146 is seen as part of a long term sideway pattern. As long as 38.2% retracement of 1.0146 to 0.9058 at 0.9474 holds, another fall is in favor through 0.9058. However, sustained trading above 0.9474 will indicate that the medium term trend has reversed, and open up further rally to 61.8% retracement at 0.9730 and above.

Daily Pivots: (S1) 135.47; (P) 135.83; (R1) 136.29; More...

USD/JPY is still bounded in range of 135.24/137.09 and intraday bias remains neutral. On the downside, break of 135.24 support will indicate short term topping, after rejection by 38.2% retracement of 151.93 to 127.20 at 136.64. Intraday bias will be turned back to the downside for 55 day EMA (now at 134.05) first. Sustained break of 55 day EMA will indicate that whole rebound from 127.20 has completed. On the upside, however, sustained break of 136.64 will indicate that fall from 151.93 has completed, and bring further rally to 61.8% retracement at 142.48.

In the bigger picture, focus remains on 38.2% retracement of 151.93 to 127.20 at 136.64. Sustained break there will indicate that price actions from 151.93 medium term are merely a corrective pattern. Such development will maintain long term bullishness. Rejection by 136.64 will, on the other hand, extend the fall from 151.93 to 61.8% retracement of 102.58 to 151.93 at 121.43 at a later stage.