KBC Sunset Market Commentary 25/01/2023 via Trader Talent

•  Germany’s January IFO business indicator came in close to expectations. The series recovered further from its previous slump, to 90.2 vs 90.3 expected. Companies considered the current situation broadly unchanged vs last month (94.1, slightly down from 94.4) but turned a bit more optimistic on the future (86.4 vs 83.2). That’s more or less confirming the message from yesterday’s all-important PMIs. But the data were unlikely to trigger a sustained yield or euro rebound as even the PMI’s were not able to do so yesterday. ECB’s Nagel said to the German newspaper Der Spiegel that rates would have to rise further with inflation risks still tilted to the upside. He warned not to sound the all clear on inflation too soon and added that he wouldn’t be surprised if rates were to rise further after March. Irish GC member Makhlouf sided with Nagel and explicitly called for 50 bps hikes in February and March. Yet, core bonds simply extended yesterday’s advance. Yields in Germany decline 2.4-4.3 bps with the belly of the curve outperforming wings. Peripheral spreads vs Germany’s 10y yield widen a few bps. Italy is lagging peers (+3 bps). US yields lose 0.5 (30y) to 2.4 bps (5y). The 6.9 bps drop in the 2y yield follows a benchmark change. UK gilts outperform global peers following deflating producer prices. The dual publication for Nov and Dec showed factory input and output prices falling on a monthly basis. The yearly figure as a result fell to the lowest, though still double-digit level since March 2022. UK yields at the shortest tenor bucks the trend by adding 3.2 bps but all other maturities ease between 4.5 and 5.1 bps. The front-end underperformance is striking since UK money markets for the first time have fully priced in a rate cut by end this year.
 
•  The Australian dollar and Japanese yen stand out on currency markets. The former after Q4 CPI beat expectations, those from analysts and the Australian central bank. Money markets raised expectations for the terminal rate by almost a full 25 bps rate hike to 3.75%. AUD/USD temporarily rose above recent highs to an intraday high around 0.712 but couldn’t maintain all of those gains. The pair is currently changing hands at 0.7065. The Japanese yen is profiting from overall risk-off (stock markets lose 0.6%-1.6% in Europe and the US) and the core bond yield decline. USD/JPY is at risk of losing 130 again. Most other dollar pairs trade in favour of the greenback, including EUR/USD (1.087, marginally down from 1.0887). Sterling whipsawed between losses and gains only to trade virtually unchanged at EUR/GBP 0.883. Except for the Polish zloty, Central European currencies are performing well despite the mild risk aversion. The Czech crown surges to EUR/CZK 23.80 – the strongest CZK level since 2008. The forint rallies post-MNB to EUR/HUF 388.64, a level not seen since June last year.
 
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•  Slovak lawmakers today approved constitutional changes to shorten their term in office and that way allowing for early elections. Snap votes had been held in the past, but the legality was questioned by the country’s top court. Parliament is now expected to officialize their shorter term tomorrow or on Friday, followed on a debate for a possible general election date. The parties in the outgoing coalition government said they would prefer September 30, while the opposition – ahead in the polls – wants the election held earlier, possibly in June or May. The next regularly parliamentary elections were scheduled for February 2024.
 
•  The Kingdom of Spain kicked off this year’s issuance with a bumper 10yr syndication (Apr2033). They raised €13bn with final demand surpassing €86bn. The amount printed and order books were the second highest on record (more than €130bn demand in January2021). The bond was priced to yield 10 bps over the outstanding Oct2032 SPGB, down from 12 bps initial guidance. Spain’s planned net debt issuance for this year amounts €70bn, the same as last year and down from €75bn in 2021 and over €100bn in 2020.