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Powell appeared before the Senate yesterday. In his renomination confirmation hearing, the Fed chair doubled down on the central bank’s policy normalization intentions. He said the economy no longer needs or wants a very supportive stance. Tackling inflation becomes instead a priority to ensure the economic expansion. This means rate hikes as well as the run-off of the balance sheet are – and we quote – likely later this year. Atlanta Fed governor Bostic earlier in the day voiced similar yet more concrete views, saying the central bank should consider a rate hike in March and start reducing the balance sheet “fairly soon” thereafter. Cleveland’s Mester and Kansas City’s George on Tuesday also preferred quantitative tightening sooner rather than later and at a quicker clip than in previous cycles. They all join several other colleagues, including Barkin and Bullard, suggesting the same in earlier speeches. Risks for the Fed reducing stimulus have become one-sided and are clearly growing.

Despite all that, US stocks had a good run. The Nasdaq (+1.41%) outperformed, clawing back above 15k. US bonds strengthened with yields declining 1.1 bp (2y) to 2.7 bps (30y) as real yields took a breather from their weeks-long surge. The long end outperformed even as the $52bn 3-year auction was a success. German bonds traded choppy. The wings of the yield curve outperformed with changes from 0.1-0.9 bps compared to a 1.3-1.9 bps increase at the belly. Declining US real yields lifted EUR/USD from 1.1326 to 1.1367. On a trade-weighted basis, DXY hit recent lows at 95.62. The positive equity sentiment kept USD/JPY in check (115.3). EUR/GBP closed at 0.8337, a new cycle low. GBP/USD retaking the 1.36 area supported that move.

Asia performs well this morning, banking on WS’s performance yesterday. Lower-than-expected Chinese inflation (1.3% vs 1.5%, from 2.3%) sparks hopes for more policy support, giving sentiment an additional boost. Core bonds inch higher this morning. The dollar loses out against most peers. EUR/USD is nearing a minor resistance zone around 1.138.

US December CPI is expected at 7% y/y at least, up from 6.8% in November. Core inflation could hit 5.4%. Risks remain tilted to the upside. Judging yesterday’s market reaction after several Fed speeches, including Powell’s, and after a failed technical break in eg. in the US 10y yield (beyond 1.77%) we nonetheless think core bond yield’s momentum could ease further in a daily perspective. Longer-term, the uptrend remains firmly in place though. The USD is slacking as well in recent days. We’re closely monitoring whether EUR/USD is able to extend gains beyond 1.138. That would bring 1.1422 on the radar. EUR/GBP’s downside looks vulnerable with the pair unable to stage a material comeback so far. We view 0.8277 as an important support.

News headlines

Polish PM Morawiecki announced a second anti-inflation package in as many months. The government will scrap VAT on staple foods, fertilizers and natural gas from February through July and reduce VAT on gasoline, electricity and heating. The PM called on retailers to reduce prices and asked Poles to watch out for shops that don’t. The proposed measures will add PLN 20bn to this year’s budget which was approved at around PLN 30bn in December last year. The Polish zloty remains near the strongest levels since September at EUR/PLN 4.54.

Chinese producer and consumer prices inflation both eased more than expected in December. PPI came down to 10.3% Y/Y from 12.9% Y/Y in November. The government’s efforts to cap commodity price surges probably plays an important role. CPI slowed from 2.3% Y/Y to 1.5% Y/Y with both food (-1.2% Y/Y) and non-food prices (2.1% Y/Y) moderating. Services inflation stayed around 1.5% Y/Y. The data give the Chinese central bank more comfort as it gradually eases monetary policy. USD/CNY currently trades near 6.36, below yesterday’s levels, but that’s mainly due to a generally softer dollar.

Global equities breathed a sigh of relief yesterday as the Federal Reserve (Fed) Chair Jerome Powell said, at his congressional confirmation yesterday, that he could pull off the hard task of fighting back inflation without damaging the economy.

He soothed investors’ nerves saying that the Fed is ‘just going to be moving over the course of this year to a policy that is closer to normal, but it’s a long road to normal from where they are now’, and ‘really should not have negative effects on the employment rate”. Hopefully, yet throwing easy money to keep the financial markets on track for a record-breaking year was the easy part of the task, now it’s time to pay the bill, and the bill is high as the party was wild.

All eyes are on the US inflation as today’s data may reveal that consumer prices in the US advanced to or above the 7% mark, a four-decade high, but investors believe that inflation will peak at this month’s print, and the trend will reverse before spring. But the truth is, no one knows where we are headed to, all we know is that the Fed has waited too long before taking an action, and if today’s inflation print is higher-than-expected, recent gains in equities will melt like snow in the sun.

Released earlier today, inflation in China eased both for consumer and producers in December. While the Chinese factory gate prices remains above the 10% mark, the easing pattern gives hope for the rest of the world.

Market roundup

US dollar is giving toppish signs as the dollar index slipped below its 50-dma, where it had been finding support for the past six months. The EURUSD finally broke above its 50-dma average and is preparing to pull down the December horizontal channel top, which is a touch below the 1.14 mark. If we see the Fed hawks take a pause, we could well see the EURUSD surge toward the 1.15 mark, but that is contingent on a no-bad-surprise on the US inflation data front as things on the European Central Bank (ECB) side are moving too slow to trigger any reversal in the trend. Gold on the other hand soared to $1821 per ounce, along with the risk rally. But I believe that the rising US yields will likely limit the upside potential in the yellow metal. And US crude is pushing above the $80 mark amid the API data showed that the US crude inventories dropped more than 3 million barrels last week. The more official EIA data is due today. The expectation is a 2-million-barrel decline, a higher decline should help the bulls drilling into the thick above $80 resistance, and any pullback will likely get a support near the $78 per barrel mark to support the actual positive trend towards the $85 level. But oil rally is also contingent on the global risk appetite and the prospects of demand recovery. If omicron continues dent the economic activity, oil bulls could find it hard to carry on with the actual crude rally.

Daily Pivots: (S1) 156.59; (P) 156.95; (R1) 157.56; More...

Intraday bias in GBP/JPY remains neutral as consolidation from 157.74 is in progress. Further rally is expected with 154.86 support intact. On the upside, decisive break of 158.19 high will resume larger up trend to 167.93 long term fibonacci level. On the downside, below 154.86 minor support will turn intraday bias back to the downside for deeper pull back.

In the bigger picture, strong rebound from 148.93 key structural support retains medium term bullishness. Firm break of 158.19 high will resume whole up trend from 123.94 (2020 low), to 61.8% retracement of 195.86 to 122.75 at 167.93. Nevertheless, firm break of 148.93 will bring deeper correction to 38.2% retracement of 123.94 to 158.19 at 145.10, and possibly further lower, as a correction to up trend from 123.94 at least.

Daily Pivots: (S1) 130.62; (P) 130.91; (R1) 131.37; More....

Intraday bias in EUR/JPY remains neutral as consolidation from 131.59 is in progress. Further rise is expected with 130.01 support intact. Whole consolidation from 134.11 could have completed with three waves down to 127.36, ahead of 126.58 medium term fibonacci level. Break of 131.59 will target a test on 133.44/134.11 resistance zone. On the downside, break of 130.01 minor support will turn bias bias to the downside for retesting 127.36 low instead.

In the bigger picture, as long as 38.2% retracement of 114.42 (2020 low) to 134.11 at 126.58 holds, up trend from 114.42 is still in favor to continue. Break of 134.11 will target long term resistance at 137.49 (2018 high). However, sustained break of 126.58 will raise the chance of medium term bearish reversal. In this case, deeper decline would be seen to 61.8% retracement at 121.94, and possibly below.

Daily Pivots: (S1) 0.8325; (P) 0.8337; (R1) 0.8351; More...

Further decline is expected in EUR/GBP despite weak downside momentum. In any case, outlook will stay bearish as long as 0.8417 resistance holds. Current down trend should target 0.8276 key long term support. On the upside, above 0.8417 minor resistance will turn bias back to the upside for stronger rebound.

In the bigger picture, price actions from 0.9499 (2020 high) are still seen as developing into a corrective pattern. Deeper fall could be seen as long as 0.8598 resistance holds, towards long term support at 0.8276. We'd look for bottoming signal around there to bring reversal. Meanwhile, firm break of 0.8598 will now be an early sign of medium term bottoming and bring stronger rebound. However, sustained break of 0.8276 will argue that the long term trend has reversed.

Daily Pivots: (S1) 1.5743; (P) 1.5784; (R1) 1.5808; More...

Intraday bias in EUR/AUD remains neutral for the moment. On the downside, break of 1.5559 will resume the fall from 1.6168 to retest 1.5250/5354 support zone. On the upside, however, break of 1.5898 will argue that pull back form 1.6168 has completed. Intraday bias will be back to the upside for 1.6168 resistance.

In the bigger picture, rise from 1.5354 is seen as the third leg of the corrective pattern from 1.5250 low. Further rise cannot be ruled out, but even in that case, strong resistance should be seen at 38.2% retracement of 1.9799 to 1.5250 at 1.6988. Larger down trend from 1.9799 is in favor to extend through 1.5250 at a later stage.

Daily Pivots: (S1) 1.0489; (P) 1.0500; (R1) 1.0511; More....

Intraday bias in EUR/CHF remains on the upside for the moment. Corrective rebound from 1.0324 would target 38.2% retracement of 1.0936 to 1.0324 at 1.0558. We'd expect strong resistance from there to limit upside to finish the rebound. On the downside, below 1.0423 minor support will turn bias back to the downside for retesting 1.0324 low.

In the bigger picture, long term down trend from 1.2004 (2018 high) is now extending. Next target is 61.8% projection of 1.2004 to 1.0505 to 1.1149 at 1.0223. On the upside, break of 1.0505 support turned resistance is needed to be the first sign of medium term bottoming. Otherwise, outlook will remain bearish even in case of rebound.

Market movers today

Today's key release is the US CPI data for December, where CPI headline inflation is likely to reach 7.0% y/y (CPI core inflation will likely exceed 5.0%). Underlying price increases have been higher than estimated for many months now so risks seem skewed to the upside. High inflation and a tight labour market with no significant rebound in labour force participation put the Fed under pressure to hike more and we are reviewing our Fed call as a result.

This morning, Norwegian GDP data for November are due out, but the figures are of a bit outdated after the omicron wave started in December.

Euro area industrial production data are due out 11:00 CET.

Tonight, the Fed's Beige Book is due. It is not a big market mover but sometimes the report includes interesting things on the underlying price pressure and labour market developments.

The 60 second overview

Risk appetite recovers: Equities and commodities recovered yesterday on the back of some calm being restored in bond markets where US yields moved lower. The rise in oil prices to just below USD84 per barrel brings them close to the recent highs from mid-October.

Powell soothes markets: Fed governor Jerome Powell reassured lawmakers and investors that the Fed would be able to bring inflation down and do it without bringing much damage to the economy. Powell did not comment on the timing of the first rate hike but confirmed that the Fed will start winding down their balance sheet; hence quantitative tightening (QT). He did not give any hints about the timing of that either, though.

Chinese inflation declines: Chinese PPI inflation dropped more than expected from 12.3% in November to 10.3% in December (consensus 11.3%). The m/m change dropped to -1.2% m/m, the biggest decline since April 2020 just after the outbreak of Covid. CPI inflation also moved lower from 2.3% y/y to 1.5% y/y. It is clear Chinese PPI inflation pressure is easing on the back of lower commodity price inflation and it likely forestalls a similar development in US and Europe over the coming 3-6 months.

Equities: Tuesday finally brought some rebound, with European and US markets all higher. Battered growth stocks rebounded, with tech and consumer discretionary in the lead. Interestingly however, the real estate sector continued to lag, despite being one of the most sold sectors the last week. Defensives and value (that has fared relatively well YTD) lagged. S&P gradually improved over the session up 0.9%, Nasdaq bounced 1.4%, Dow 0.5% and Russell 1.1%. Asian markets are following the rebound trail this morning, with Hang Seng and Kospi both bouncing 2%. Likewise, US futures point slightly higher.

FI: The main event today is the US inflation data for December, where the headline inflation is expected to reach 7% y/y and core-inflation 5.4% y/y. However, the core-inflation is expected to decline from 0.8% m/m to 0.4% m/m. Still, a lower m/m number should not change much on the pricing of the Federal Reserve as they need more than one number to change their view on QT and rate hikes.

FX: USD weakened against most of the G10 currency sphere yesterday, where Scandies and commodity currencies came out on top. EUR/NOK fell below the 10.00 level and EUR/SEK dropped to around 10.28.

Credit: Credit markets were more constructive yesterday in spite of heavy primary activity. iTraxx Main tightened 0.9bp to 50.7bp while Xover tightened 6.1bp to 250.8bp.

Nordic macro

Today brings Norwegian GDP data for November, were we expect mainland growth recovered to 0.5% m/m after being pulled down for technical reasons in October. Figures are of course a bit outdated after the omicron wave started in December, so market reaction should be limited.

Daily Pivots: (S1) 1.1330; (P) 1.1352; (R1) 1.1392; More...

No change in EUR/USD's outlook as range trading continues. Intraday bias stays neutral for the moment. On the upside, sustained trading above 55 day EMA (now at 1.1385) will bring stronger rise back to 1.1663 support turned resistance. On the downside, break of 1.1185 will resume larger decline from 1.2348. Next target is 161.8% projection of 1.2265 to 1.1663 from 1.1908 at 1.0934.

In the bigger picture, there are various ways of interpreting the fall from 1.2348 (2021 high). It could be a correction to rise from 1.0635 (2020 low), the fourth leg of a sideway pattern from 1.0339 (2017 low), or resuming long term down trend. In any case, outlook will now stay bearish as long as 1.1703 support turned resistance holds. Sustained break of 61.8% retracement of 1.0635 to 1.2348 at 1.1289 would pave the way back to 1.0635.

Daily Pivots: (S1) 1.3586; (P) 1.3611; (R1) 1.3661; More...

Intraday bias in GBP/USD remains on the upside at this point. As noted before, corrective fall from 1.4282 should have completed with three waves down to 1.3158, after hitting 1.3164 medium term fibonacci level. Further rally should be seen to 1.3833 resistance next. On the downside, below 1.3531 minor support will turn intraday bias neutral first. But further rise will remain in favor as long as 55 day EMA (now at 1.3468) holds.

In the bigger picture, strong support was seen from 38.2% retracement of 1.1409 to 1.4248 at 1.3164. The development suggests that up trend from 1.1409 (2020 low) is still in progress. On resumption, next target will be 38.2% retracement of 2.1161 to 1.1409 at 1.5134. Nevertheless sustained break of 1.3164 will argue that whole rise from 1.1409 has completed and bring deeper fall to 61.8% retracement at 1.2493.