Monday, 6 February 2023
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Markets

•          Friday was all about exceptionally strong US payrolls and a sharp rebound in the services ISM. The former showed a 517k job creation in January with details strong across the board. The unemployment rate fell to a 54-y low of 3.4% while the participation rate edged higher to 62.4%. Earnings rose 0.3% to 4.4% following an upward revision for the month before. Some referred to seasonal factors explaining the consensus smashing outcome but even if that has something to do with it, the labour market is simply on fire. The services ISM in January rebounded from 49.2 to 55.2, well beyond the 50.5 analyst consensus and suggesting the sudden sub 50 drop in December was an outlier. The gain was supported by business activity and new (export) orders both jumping above (or close to) 60. Employment narrowly escaped from contraction territory (50 from 49.4). It was a one-two blow for US Treasuries and investors doubting the Fed’s inflation commitment. Yields shot up 6.7 bps to 18.4 bps with the curve’s inversion deepening again. German yields rose in the slipstream, supported by a slew of hawkish central bank speeches and comments (Vasle, Simkus, Kazimir, Muller, Rehn). They added 5 to 12.5 bps with the long end underperforming. A risk-off equity environment (WS up to -1.6% lower) and the front end rate differential gave wings to the dollar. DXY rose towards the 103 resistance area (2020 panic high), up from 101.83. EUR/USD tested 1.0942 going into the payrolls before sliding into a 1.0795 close. USD/JPY soared from 128.68 to 131.19. Sterling lost out, especially against the USD. GBP/USD dropped from 1.222 to 1.205. EUR/GBP rose from 0.892 to 0.895. UK gilt outperformance and risk-off (in US dealings) were the main factors. Bank of England chief economist Pill said the central bank needs to seek a balance in setting monetary policy and said they must “guard against” doing too much. He added that markets interpret the BoE’s guidance correctly, implying an end to the tightening cycle soon.

•          Asian markets start the week on softer footing. The US downing the alleged Chinese spy balloon adds to geopolitical uncertainties. An upcoming trip to China by Secretary of State Blinken has been postponed because of the matter, dampening hopes for a thaw in US-Sino relations. Stocks in China drop up to 3%. The Japanese yen underperforms on FX markets (cfr. infra). Core bonds extend Friday’s decline this morning with US cash yields dropping up to 5.9 bps at the front. The economic calendar is all but empty. The strong batch of US eco data on Friday served as a wake-up call that may continue to set the tone today in a way that’s reminiscent of much of 2022: stocks and bonds down, the dollar up. Geopolitics will linger as well. From a technical point of view, the US 10y yield weekly close above 3.50% is a positive sign. We look out for core bond yields to bottom out further. Support/dollar resistance in EUR/USD is located at 1.0735.

News Headlines

•          Japanese newspaper Nikkei reported that the Japanese government approached BoJ deputy governor Amaniya to succeed current governor Kuroda after his term ends in March. Amaniya is considered the candidate who’ll opt for continuity in the BoJ’s ultra-easy monetary policy given that he’s a long term Kuroda ally and architect of some the policy instruments. The report was later denied by the Japanese government, but can’t prevent the Japanese yen from losing ground this morning despite risk-off market sentiment. Ever since the BoJ unexpectedly widened the 25 bps corridor around the 0% target for the 10y yield to 50 bps, the market has been trying to frontrun next normalization steps. USD/JPY hovers around 132. On Friday, JPY already suffered a serious beating on rising US interest rates.

•          Australian inflation-adjusted retail sales (volumes) declined by 0.2% Q/Q in the final quarter of last year (vs -0.5% expected). Retail volumes fell for the first time since Q3 2021 with volumes falling across all non-food industries as consumers tightened discretionary spending in response to mounting cost of living pressures. Retail prices remain high, but price growth slowed to 1.1% Q/Q in December due to flat food retailing prices and additional discounting during Black Friday sales. This was the smallest rise in retail prices for 2022. In a separate release, Melbourne Institute monthly inflation numbers rose by 0.9% M/M with the Y/Y-reading rising from 5.9% to 6.4%, the highest on record. Today’s data are the final input before tomorrow’s RBA meeting which is expected to deliver another 25 bps rate hike (to 3.3%).

Graphs

The ECB flagged another 50 bps rate hike in March, accompanied by QT. This clear prioritization to combat inflation failed to push the 10-y Bund towards the cycle top just north of 2.50%. Markets even reacted dovish. We stick to our view that the depo rate will peak at >=3.50% and that markets are way too complacent on the ECB’s reaction function. First support stands at 1.96%.

The December dots confirmed the Fed’s intention to raise the policy rate north of 5% and to keep it above neutral over the policy horizon. US yields rebounded, but markets doubt this guidance as recessionary fears linger. The February policy meeting (+25 bps) again failed to convince them but a stellar January jobs report did the trick. Support between 3.32% and 3.4% survived. The 10y yield instead is now focused at the 3.50% resistance area.

The December dots confirmed the Fed’s intention to raise the policy rate north of 5% and to keep it above neutral over the policy horizon. US yields rebounded, but markets doubt this guidance as recessionary fears linger. The February policy meeting (+25 bps) again failed to convince them but a stellar January jobs report did the trick. Support between 3.32% and 3.4% survived. The 10y yield instead is now focused at the 3.50% resistance area.

The BoE raised its policy rate by 50 bps in February, but suggested that rates will peak after a final move in March. The UK central bank that way causes a yield disadvantage for sterling, which already has weak structural cards (e.g. weaker growth prospects, twin deficits, long term brexit consequences …) EUR/GBP is breaking through the high 0.88 resistance (recent highs) zone. There’s little in the way technically towards 0.92.

Calendar & Table

Note: All times and dates are CET. More reports are available at KBCEconomics.be which you may sign up to.

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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