Overview: The apparent campaign by Fed officials to
calm market fears that its operational flexibility was going to choke growth is
having the desired effect. The implied yield of the December Fed funds
futures contract is easing for the second session after jumping by more than 25
bp in the previous five-session slide. Tech earnings from Alphabet, Meta,
Snap, Pinterest and AMD is helping extend the dramatic recovery in the NASDAQ,
where the futures contract is up another 1% today. Most Asian centers are
still on holiday, but those markets that are open were all up over 1%,
including Japan, Australia, India, Singapore, and New Zealand. Europe's
Stoxx 600 is posting its third day of gains, led today by information technology and financials. The 10-year US Treasury yield is firm a little below 1.80%, ahead of the quarterly refunding announcement later today. European bond
yields edged higher after the eurozone's upside CPI surprise. The dollar is softer against the
major currencies. The Scandis are leading, while the
Canadian and New Zealand dollars are lagging. Emerging market
currencies are more mixed. Turkey and South Africa are heavier, but the
Russian rouble continues to recover. It is higher for the fifth
consecutive session and has gained around 5% over that span, leaving it about
2% lower on the year. The JP Morgan Emerging Market Currency Index is
slightly higher after gaining around 1.2% over the past two sessions.
Gold is little changed. It needs to resurface above the $1808-$1810 area
to be of note. Oil prices remain firm, with the March WTI contract knocking on $89 ahead of the OPEC+ decision, and after API estimated a 1.65 mln
barrel decline in US oil stocks, according to reports. US natural gas
prices are fully recouping yesterday's 2.5% decline, while Europe's benchmark
has steadied after falling nearly 19% over the past two sessions. Copper
is lower for the third session.
Asia Pacific
There are days in which
Japan's 10-year benchmark bond does not trade, but the JGB market is being
closely watched now. Yields are slowly creeping up, largely as a function of higher
global rates. Some observers expected it to step up its bond buying at
today's operations, but it did not. Still, some are not deterred and warn
that the BOJ could conduct unscheduled bond-buying if yields continue to
rise. Yield-curve control aims to keep the 10-year yield within 25 bp of
the zero. It is being encouraged by the IMF to target a shorter
maturity. Japan's five-year yield is flirting with zero for the first
time since the negative rate policy was adopted in January 2016. In our
discussions with BOJ officials, we were left with the impression that they
would not stand in the way of a global adjustment of rates. Recall that
in April, last year's drop in mobile phone charges will no longer be in the
12-month measure of CPI, which will lift the headline and core
rates.
News that Q4 unemployment
slipped in New Zealand to its lowest level since 1986 (3.2% vs. 3.3%) underpins
expectations for another rate hike at the meeting later this month. Recall New Zealand lifted its cash
target rate in October and November by 25 bp to 0.75%. The swaps market
sees the RBNZ as the most hawkish central bank this year with nearly 175 bp of
tightening priced in over the next 12 months. Most of it (110 bp) is expected
in the next six months. The market sees about a 1-in-5 chance of a 50 bp move
at its February 23 meeting.
The dollar is approaching
important support against the Japanese yen near JPY114.30. It represents a (61.8%) retracement of the greenback's gains last week that took it from about JPY113.50 to almost
JPY115.70. There may be some support around JPY114.00 but the risk is a
return to the JPY113.50 area especially if US yields ease on what is expected
to be a soft ADP jobs estimate. The dollar has been unable to resurface above
JPY115.00 today, where a $825 mln option expires. Tomorrow there are
about $1.9 bln of options in the JPY114.90-JPY115.00 that roll-off.
After approaching three standard deviations from its 20-day moving average at
the end of last week, the Australian dollar has bounced back this
week. It has approached $0.7150 after the pre-weekend low
slightly below $0.6970. The $0.7160 area, which holds the (61.8%)
retracement of the leg down from the January 22 high (~$0.7280) and the 20-day
moving average may offer a nearby cap. The offshore Chinese yuan is
enjoying a slightly firmer bias. The US dollar is near CNH6.3640. Recall ahead of the holiday that has shut mainland markets, the greenback
settled near CNH6.3680.
Europe
Eurozone inflation surprised
the market. Rather
than fall from 5.0% to 4.4% as the median (Bloomberg survey) projected, it
rose to 5.1% a new high. The monthly increase was 0.3%. The market
looked for a 0.4% decline. However, this seemed to partly reflect energy
prices. The core measures eased to 2.3% from 2.6%, which is not quite as
much as expected. Although the euro traded higher on the headline; the
swaps market has already turned relatively hawkish on the ECB. It was
already pricing 35 bp of higher rates over the next 12 months. And the
first hike is fully discounted by late Q3 or early Q4. The ECB meets
tomorrow.
The German two-year yield
rose 17 bp in the six-day jump that may be snapped today. The yield is slightly softer today,
after the CPI report, in what could be a case of sell the rumor buy the
fact. Similarly, the 10-year yield has risen from almost minus 0.11%
on January 24 to almost 0.04% yesterday, its highest level since May
2019. The yield is a basis point lower on the day near 0.025%.
The euro is extending its
recovery after forging a base near $1.1120 at the end of last week and the
start of this week. The
unexpected rise in the eurozone CPI lifted the single currency to around
$1.1315, meeting the (50%) retracement objective of the slide from
mid-January's high near $1.1485. The next retracement (61.8%) is around
$1.1345. The Bank of England meets tomorrow too, and the market expects a hawkish hike. Sterling is also extending its recovery from last
week's low near $1.3360. It has approached the (50%) retracement
objective of the move lower since the middle of last month, which is found near
$1.3555 and the 20-day moving average. The next target is $1.3600.
America
There is a wide dispersion
of forecasts for the January non-farm payrolls out on Friday. The responses in the Bloomberg survey
range from -400k to up 250k. The average is a little less than 90k and
the median is 150k. ADP gives us its estimate of the change in private
sector jobs. The median in the Bloomberg survey is for 184k down from
807k. ADP does not provide much illumination in the short run.
In Q4 21, ADP's three-month average was 625k, while the official private sector
job growth averaged a little less than 400k. However, for the entire
year, the two time series were as tight as could be expected. Pending
revision to the December data, the BLS estimated an average increase of 500k
private sector jobs a month, while ADP estimated a 514k average.
More Fed officials have been
speaking, and no one seems to be endorsing a 50 bp increase in March. This is even true of the hawk
Bullard, who appears inclined for five hikes this year. Recall that in
December, there were two dots (Fed views) pointing to a 125 bp increase in rates
this year. The December Fed funds futures have four hikes fully
discounted and an 80% chance of a fifth. Yesterday, the implied yield of
the contract fell for the first time since the FOMC meeting began last
Tuesday. Through Monday, it had risen 28 bp.
News that Lujan, a
Democratic Senator from New Mexico suffered a stroke, requiring surgery, is a
personal tragedy with political implications. His absence leaves 49 Senators in
the Democratic caucus. This seems to strike party-line
voting--legislation as confirmations. This also includes the China bill that
also looks to aid the US chip industry. The GOP is pushing back on grounds
that it is too easy on Beijing. There is also a bill looking to specify
sanctions on Russia if it invades Ukraine. The White House appears to be
pushing against it, preferring to retain some strategic ambiguity to ostensibly
strengthen deterrence.
The Canadian dollar is
trading quietly in a narrow range around yesterday's settlement
(~CAD1.2685). The
greenback traded down to around CAD1.2655 yesterday but the downside momentum
eased. Nearby support is seen in the CAD1.2625 area, which houses a (50%)
retracement objective of the US dollar's bounce in the second half of January
and the 20-day moving average. The greenback is extending this
week's losses against the Mexican peso. The break of the
MXN20.52 area could spur an initial move toward MXN20.40. Brazil's
central bank has pre-committed to hiking the Selic rate by 150 bp to 10.75%
later today. Its forward guidance is arguably more important than the
widely expected hike. With inflation falling for the past two
months, ideas that the tightening cycle is almost complete has encouraged flows
into the Brazilian assets. The Brazilian real has appreciated by almost
5.9% this year coming into today, second only to the nearly 6.1% gain of the
Chilean peso. Yesterday, the dollar fell to about BRL5.2650, its lowest
level since last September. The next area of chart support is seen around
BRL5.20.
Disclaimer
Reviewed by Marc Chandler
on
February 02, 2022
Rating:
