• Short-term yields in the US and Europe finally took a breather after a sharp hawkish repositioning. Fed Powell at last week’s policy meeting signaled the Fed would accelerate policy normalization as inflation is rising faster than expected and probably will last longer than the Fed anticipated until now. Powell’s view for sure prevails within the Fed. However, after Raphael Bostic yesterday opened the debate on a 50 bps rate hike in March, other colleagues (George, Daly) overnight advocated to stick to a gradual approach. Whatever the trigger, markets almost discounting five 25 bps rate hikes this year apparently provides a good enough reason for the interest rate rally to take a pause. The US yields curve slightly steepens with ST yields ceding about 1.5 bps (2-y) as 10’s and 30’s are raising marginally (0.5 bps). The rise in European interest rate markets also slowed, but Europe still slightly underperforms the US with the German yields gaining up to 2.0 bps (30.-y). In line with data evidence from other EMU countries over the previous days French January inflation printed stronger than expected at 0.1% M/M and 3.3% Y/Y (from 3.4%) raising the risk of an upward surprise for the European HICP scheduled for release tomorrow. Anyway, it will be interesting input as the ECB debates monetary policy at its first regular meeting of the year on Thursday. Interestingly, at -0.48% the German 2-y yield is touching the highest level since early 2016 and finally returned north of the ECB deposit rate! The relative calm on the bonds markets also supports a further comeback of equities. European indices are rebounding 1%/1.5% on average. US indices are opening little changed to marginally lower after significant daily gains on Friday and yesterday.
• The dollar in the second half of last week was a major beneficiary of the higher short-term US yields and a spike in global volatility post-Fed. However, yesterday, the euro started a remarkably comeback, as short-term interest rates show investors grow ever more convinced that the ECB will be forced to amend its guidance not to raise interest rates until asset purchases will be finished at earliest end 2022. Despite limited moves on interest rate markets today, the euro maintained a positive momentum. EUR/USD is testing the 1.1270 area (compared to a correction low near 1.1121 end last week). At the same time, the dollar is losing further momentum. This doesn’t only apply to EUR/USD. USD/JPY (114.75) and the DXY index (96.31) are also falling prey to further profit taking. After a euro driven rebound yesterday, EUR/GBP today traded sideways near the 0.8350 pivot, awaiting more BoE guidance as Bailey an Co are expected to continue the rate hike cycle at Thursday’s policy meeting.
• The Czech Statistical Office published preliminary Q4 GDP numbers today. The economy grew by 0.9% Q/Q and by 3.6% Y/Y, significantly beating consensus (0.2% Q/Q & 2.9% Y/Y). External demand was the biggest growth engine in this quarter. Over the whole of 2021, the Czech economy grew by 3.3% compared to 2020. The growth was supported by final consumption expenditure and a change in inventories, whereas external demand had a negative influence. Employment increased by 0.1% in 2021. In Q4, it remained unchanged in Q/Q terms. The Czech Koruna remains well bid today going into Thursday’s CNB meeting which is expected to deliver another 75 bps rate hike (to 4.5%). EUR/CZK drops towards 24.25 and seems ready for a test of the sell-off low at 24.20.
• The European Central Bank published its January bank lending survey. Credit standards for loans or credit lines to enterprises tightened very slightly in Q4 2021. Regarding loans to households for house purchases, EMU banks reported unchanged credit standards while credit standards for consumer credit and other lending to households eased moderately. Banks continue to hold an overall benign view of firm credit risks, owing mainly to a positive assessment of economic outlook. In Q1 2022, banks expect credit standards to remain broadly unchanged for loans to firms, to tighten moderately for housing loans and to ease further for consumer credit. Banks reported, on balance, a considerable increase in firms’ demand for loans or drawing of credit lines in Q4 2021.