FOMC Minutes offered little added flavor to what is commonly known. The Fed will soon implement a first rate hike and participants agreed that “if inflation does not go down as expected, it would be appropriate for the committee to remove political housing faster than they currently expect. ” Since that January FOMC meeting, we have been receiving accelerating inflation numbers and a stellar salary report. Markets have already reacted accordingly by positioning themselves much more aggressively. This includes cumulative 150-bps exchange rates this year with the investment community divided by the size of the former: 25-bps or 50-bps. A protocol did not provide details on this specific issue, nor on the timing / pace of the balance sheet reduction.
The front end of the US yield curve surpassed after the Minutes. The long end stabilized after failing to respond to stronger U.S. retail sales earlier in the day. Both reinforce our call that we are up for a period of consolidation / correction in core bonds, especially while risk sentiment remains fragile.
Upcoming key eco-updates in EMU and the US are due only in early March. The US yield curve bull rose yesterday with a yield declining by 5.6 bps (2-year) to 0.4 bps (10-year). German yields lost 1.5 bps to 3.3 bps across the curve with the belly over the wings. 10-year yield spread changes against Germany barely moved. Greek bonds did not respond to comments from an ECB spokesman, who said the qualification of Greek bonds for refinancing instruments would be reviewed in time for their expiration in June 2022. Rumors have it that the ECB is working to extend the measure to 2024. Greece itself hopes to regain its investment status next year, making the exemption no longer needed.
EUR / USD maintained its slightly upward bias yesterday, closing at 1.1373 from 1.1359 open. EUR / GBP closed at 0.8372 compared to 0.839 open. Sterling did not respond to high, but more or less in line, January inflation data.
Risk / geopolitics dominates Asian business this morning. Luhansk separatists claim that Ukraine’s violation of ceasefire rules for a while remains in doubt about the alleged Russian troop withdrawal. Japanese stock markets are lower than regional peers, sliding up 0.8%. Core bonds benefit.
Today’s eco-calendar contains U.S. housing data, weekly jobless claims and the Philly Fed’s business outlook. We don’t expect them to lead a business. ECB Lane chief economist’s speech could be the highlight of Schnabel’s heavyweights (cannot ignore house price rise in inflation) and Villeroy (Purchase of bonds could end in Q3) shifted to a more aggressive inflation stance earlier this week. Such a move of the uber dove would be very significant. Except for Lane, all eyes will be on the delicate risky climate.
The Australian labor market in January withstood the spreading Omicron variant quite well. The economy added 12,900 jobs against expectations for a steady figure. The unemployment rate (4.2%) remained unchanged near the lowest level since 2008. The turnout rose slightly from 66.1% to 66.2%. Consequences of the omicron wave were visible in an 8.8% decrease in the hours worked. As this effect is expected to be temporary, the odds are good for a further recovery of the labor market. The RBA has made further improvements in the labor market, and in particular a rise in wages, as a key to starting raising tariffs. Today’s data probably will not change the RBA’s rating profoundly. The 2-year (-5 bps) and 10-year Australian yield (-2.5 bps) declined slightly this morning, but this was mainly due to a wider market move (test risk-off). Still market prices have slightly lowered the probability of an RBA June rate to around 50%. The Australian dollar is easing to trade at 0.7185.
Japan in January recorded an unjustified monthly trade deficit of JPY 2,191 billion, the largest since January 2014. Export growth slowed unexpectedly from 17.5% Y / Y to 8.6% Y / Y. The monthly growth of exports (SA) has almost stopped, as the steady impact of omicron and supplies is slowing down foreign sales. At the same time the value of imports continued to rise in double-digit numbers (39.6% Y / Y), reaching the highest amount recorded (JPY 8 523 billion) due higher costs of energy products.