Markets
Markets on Friday again took somewhat of a biased reading, both of the developments in the Middle East and the US eco data. The air strikes of the US and the UK against Houthi targets in Yemen (temporarily) propelled Brent oil above $80 p/b. However, the impact on other markets was a bit diffuse. Higher oil prices hardly affected yields and equity markets held in positive territory. US PPIs, a series that is often ignored especially when it is published after the CPI release, again showed markets’ bullish bias towards bonds. What can’t go up, must come down. On Thursday, a higher-than-expected CPI failed to trigger a further rebound in yields. A slightly softer than expected PPI (-0.1% M/M and 1.0% y/y, vs 0.1% and 1.3% expected) this time was seen as a good enough reason for the Fed to embark on an aggressive rate cut cycle this year. In a outright steepening move, the US 2-y yield declined 10.1 bps. The 30-y finished marginally higher (+0.25 bpn). Markets again discount a 75% chance of a first Fed rate cut in March and more than 150 bps of rate cuts by the end of the year. To be honest, we don’t see how recent data (labour market data, CPI) would force the Fed for such an aggressive approach. German yields, which still had some catching up to do, also declined between 10.9 bps and (2-y) and 3.1 bps (10-y). For equity investors, softer monetary conditions still outweigh lingering (geopolitical) uncertainty. The EuroStoxx 50 gained 0.85%. US equities were little changed going into the long weekend. Still no clear directional trend in the major FX cross rates. The DXY USD index closed marginally higher at 102.4, perfectly in the middle of the ST 102/13 consolidation range. Similar story for EUR/USD (close 1.0951). The yen slightly outperformed on lower core yields (USD/JPY close at 144.88).
This morning/today trading in major markets is taking a slow start as US markets will be closed for Martin Luther King Day. Asian equities are trading mixed with Japan still outperforming (Nikkei + 0.9%). The Japanese 2-y yield revisits the 0.0% barrier as investors see ever less urgency for the BoJ to make a policy U-turn anytime soon.
Today, the eco calendar mainly contains data of secondary importance. Later this week, US retail sales (Wednesday) and Michigan consumer confidence (Friday) are interesting. China will release Q4 GDP data on Wednesday. Plenty of central bankers will also attend the World Economic Forum in Davos. Will they use the Forum to give an assessment on recent market positioning? Probably quite some clear speak from CB heavyweights is needed to amend current soft market reaction function. On FX markets EUR/USD is blocked in a tight sideways range between 1.0875 & 1.10. EUR/GBP trading might become a bit more lively compared to last week, with UK labour market data (Tuesday), inflation data (Wednesday) and retail sales (Friday) scheduled for release.
News & Views
Current vice president Lai Ching-te won the presidential elections in semiconductor-spewing Taiwan on Saturday. The ballot in these heated geopolitical times was seen as the most pivotal one in decades. Lai of the ruling Democratic Progressive Party secured about 40% of the votes. He won from opposition parties willing to restart the dialogue with China after being suspended under DPP rule for eight years. Taiwan is now gearing up for a record third straight term under the party that seeks to minimize Chinese influence. That said, Lai must look for a delicate balance in maintaining strong ties with major democracies including the US while avoiding (escalating) tensions with Beijing that could erupt into a conflict.
The Chinese central bank kept a key policy rate steady at 2.5% this morning. Expectations were for a slight cut to 2.4% after a series of disappointing data last week, including negative CPI and PPI growth and lower-than-expected credit growth. Instead, the PBOC opted for a liquidity injection that was larger than anticipated. The weak yuan is seen as deterring the central bank from going all-in with rate cuts. Combined with uncertainty over the Fed policy rate (cut in March, May or even later?) the PBOC isn’t willing to the jump the gun. USD/CNY eases marginally to 7.17 this morning. In October last year, the pair was trading around 7.3, the weakest CNY level since 2007. A senior central bank official recently did say the central bank may cut the reserve requirement ratio, probably in Q1. That would also unleash additional liquidity into the system.
