Monday, February 6, 2023

Daily Market Overview

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• Last Friday’s stellar US payrolls (labour market even tighter than expected) and non-manufacturing ISM (US economy more resilient than feared) continue feeding into markets. Recall their dovish reaction to Fed (and ECB) meetings last week even if they were already disobeying central bank’s guidance. From Friday, they had to back down on those dovish bets. Fed fund futures now discount a policy rate peak of 5%-5.25% (in line with Fed dots) compared with 4.75%-5% ahead of the data. The December23 future now trades at 4.75% compared with 4.4%. US yields add another 6 bps (30-yr) to 12.3 bps (2-yr) today. This week is extremely thin from a data point of view. On Friday, we’ll get University of Michigan consumer confidence (February) and the annual CPI revisions when seasonal adjustment factors are recalculated to reflect price movements from the previous calendar year. They come on the heels of next Tuesday’s January US CPI figures which is the next big data point. We look out for comments by Fed governors and their interpretation of Friday’s figures. Tomorrow’s interview at the Economic Club of Washington of Fed Chair Powell is the key one. In light of recent events/market moves, we think markets will no longer snub any hawkish references or solely pick out the dovish twists as they during Wednesday’s Q&A. Look out for extra details for example financial conditions. German Bunds followed US Treasuries south. German yields add 5.6 bps (2-yr) to 10 bps (10-yr) with the belly of the curve underperforming the wings. UK Gilts are even more in sell-off mode with yields surging 14 bps (30-yr) to 22 bps (2-yr). The underperformance is linked to hawkish comments by BoE policy maker Mann. She vowed her colleagues to stay the course, in a reference to ECB Lagarde’s inflation fighting language: “The consequences of under tightening far outweigh the alternative. We need to stay the course and the next step is still more likely to be another hike than a cut or hold. A tighten-stop-tighten-loosen boogey looks too much like fine-tuning to be good monetary policy. It is both hard to communicate and to transmit through markets to the real economy.”  
• The sell-off on bonds markets spreads to stock markets again. Geopolitics add to the heavy picture (China – US over alleged spy balloon). Main European indices suffer losses to the tune of 1.5%. US benchmarks open a half percent lower. The dollar holds to Friday’s momentum. The trade-weighted greenback is testing support-turned-resistance at 103.45 (Dec22 low). EUR/USD is drifting from the 1.08 area to 1.0750. First support stands at 1.0735. Higher core bond yields and denied rumours that current deputy governor (and dove) Amaniya is in pole-position to succeed governor Kuroda from April, push USD/JPY above 132.50 despite the risk-off climate. Sterling gets some breathing room thanks to relative yield dynamics. EUR/GBP slides from 0.8960 to 0.8930. Less liquid currencies or EM FX face difficulties in today’s overall climate. EUR/SEK for example tested the 2020 top at 11.43, the weakest level for the Swedish krone apart from the 2009 SEK-bottom at EUR/SEK 11.79.
News & Views

Saudi Arabia raised oil prices for its main market of Asia and lifted prices for the US and Europe as well. The decision to increase its flagship Arab Light grade to $2 a barrel above the regional benchmark (Oman crude) came as a surprise given that crude prices have dropped about 7% this year so far. Many OPEC members have sounded optimistic about China and its reopening. The group’s secretary-general al-Ghais said consumption in the country has already been on the rise. But for commodity markets the (anticipated) growth slowdown in Europe and the US after interest rates increased sharply is an at least equally important factor. Oil prices do rise about 1.5% today. Brent oil is currently being sold at $81.2/barrel.
• Spanish rents soared to record levels, with gains in the country’s two largest cities propelling prices. January rents in Barcelona rose a staggering 25% y/y while jumping 12% in Madrid, Idealista data showed today. It helped bring the national average to €11.6 per square meter. The phenomenon is the result of the historical tightening spree by the ECB. Increased financing costs pushes people away from home ownership to the rental markets, where supply is tight.

Graphs & Table

Trade-weighted DXY: risk-off and echoes from Friday’s US eco data propel the dollar

USD/JPY extends ascent from the downward sloping trend channel. Yen-weakness at play too amid rumours about Kuroda’s successor

UK 10y yield jumps about 20 bps after BoE’s Mann adopts ECB language and vows to stay the course

Nasdaq: ready to retrace all post-Fed gains?

Note: All times and dates are CET. More reports are available at 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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