Sunset Market Commentary – Action Forex
Spanish January inflation numbers and German (regional) data soon sent the same message: European inflation won’t fall back as much as thought at the start of the year. The Spanish setback, related to a sharp rise in the electricity bill in January last year, was compensated for by rising core prices such as food and utilities. Downward tax-related German price pressure was partly offset by soaring energy prices and rising costs of services. Spanish and German national readings (EU harmonized) came in at respectively 6.1% Y/Y (from 6.6% vs 5.5% expected) and 5.1% Y/Y (from 5.7% vs 4.3% expected) and pose significant upside risks to Wednesday’s EMU reading. Consensus currently expects an easing from 5% Y/Y to 4.4% Y/Y. Simultaneously, it makes it harder for the ECB to defend its very accommodative monetary policy stance at Thursday’s policy meeting. We nevertheless only expect a U-turn to the ostrich politics in combination with updated inflation forecasts (i.e. March the earliest). Bond markets side with the view that the ECB will forced to acknowledge the inflation problem sooner than later. Today’s price action is testament to that view. German Bunds underperform US Treasuries and UK Gilts. German yields add 7.7 bps (3-yr) to 5.6 bps (30-yr) in a gentle bear flattening move. The German 2-yr yield moved above -0.55% for the first time since March 2019. Key resistance stands around -0.50% which are the 2018/2019 tops. A move above means the highest German 2y rate since January 2016. The German 10-yr yield returned to positive territory. Important resistance kicks in at 0.15% which is 62% retracement on the 2018/2019 decline. The European 10-y swap rate posts a new recovery high at 0.47% with similar resistance at 0.59% (62% retr.). European money markets keep pulling forward expectations on positive 3-month Euribor rates to currently around March next year. 10-yr yield spreads vs Germany narrow by up to 5 bps for Italy after President Mattarella was re-elected, thereby keeping PM Draghi in charge of the fragile government of national unity and avoiding a snap poll in the key reform year 2022. The US yield curve bear steepens today with yields rising by 1.9 bps (3-yr) to 4.3 bps (30-yr). The euro slightly benefits against the dollar and sterling from today’s front end interest rate support. EUR/USD currently changes hands just below the 1.12 handle, coming from an open near 1.1150. EUR/GBP rises from the low 0.83-zone towards 0.8330. European stock markets started on a strong footing, but gradually returned gains as the sell-off on bond markets intensified. Main indices currently trade near Friday’s closing levels. Losses/gains for main US benchmarks at the start of trading vary between -0.3% (Dow) and +0.9% (Nasdaq). Brent crude extends its steep march since mid-December, to currently trade above $91/barrel. The stalemate in the Russia/Ukraine conflict remains.
The IMF’s financial counsellor and head of the monetary and capital markets department Tobias Adrian warned cryptocurrencies are causing “destabilizing” capital flows in emerging markets. Adrian said it is posing ‘immediate and acute risks” with crypto being used to replace traditional, existing currencies (“cryptoisation”). He also flagged the closer correlation between the performance of cryptos and other financial assets in developed countries. IMF officials believe that significant crypto selloffs are increasingly feeding into stock markets. It urged global regulators start building a consistent supervisory framework.
US 30y mortgage rates trade at their highest since the early days of the pandemic. The average bank rate currently stands at 3.74% vs the all-time low at 2.82% in February 2021. It is also a steep increase from the 3.27% just one month ago. MBS have been underperforming USTs lately, pushing spreads substantially higher too. Mortgage rates are generally rising as the Fed prepares to normalize its policy. One of the steps includes reducing the $2.7tn big mountain of mortgage backed securities, almost double the amount compared to before the pandemic.
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