Oil prices have been volatile recently, but have continued to rise since yesterday morning. US stock markets have also caught a bid, with yesterday’s rise implying positive returns year-to-date.
The overnight news-flow is fairly lacklustre, but includes the Australian central bank RBA lowering its forecasts. This is not surprising given its rate cut earlier this week. The People’s Bank of China raised its reference rate for the CNY, forcing some appreciation.
Elsewhere, economists at the Federal Reserve are arguing that the benefits of aggressive Fed policy are yet to peak. If the Fed feels confident in its forecasts – a big if – this is an argument that can be used to motivate a relatively hawkish stance.
The Danish central bank announced another interest rate cut yesterday. The interest rate on certificates of deposit (CD rate) was lowered by 25 bp to -75 bp, while the lending rate, the discount rate and the current account rate were all left unchanged. It is the fourth rate cut in just three weeks as capital inflows remain excessive.
As expected, the German and Greek Finance Ministers Schäuble and Varoufakis “agreed to disagree” on the Greek proposals. The meeting confirmed our view that the road to compromise will be long and bumpy.
The Bank of England (BoE) kept rates unchanged at 0.5%, as expected, while asset purchases remained at GBP 375bn. Our forecast is that the BoE will start raising rates in Q4 this year.
Of the US numbers out yesterday, the NFIB report was probably the most interesting. It showed that 26% of small firms are unable to fill job openings; this matches the highs of this business cycle. This is another sign of more upward wage pressure. Also, the US trade deficit surprised by widening sharply in December, and 4-week average jobless claims increased to a seasonally adjusted 278,000.
Day ahead
Today’s by far most important event will be the US labour market report. However, we would also point to the German industrial production numbers which we expect to surprise on the upside.
We expect a 200k increase in non-farm payrolls in January, somewhat below the 231k consensus estimate and significantly weaker than the strong 252k rise in December. Our forecast is significantly weaker than the 3-month average increase of 289k, as we are looking for a correction of recent exaggerated strength in employment. The case for a below-consensus gain in payrolls is supported by the fact that January payrolls have had a tendency to disappoint for some years (see chart).
We expect the US unemployment rate to remain at 5.6% after the 0.2% point drop in December, assuming a rebound in the labour force after the drop in labour force participation in December.
In Germany we expect December’s industrial production to have increased by 0.5% m/m, somewhat more than the consensus. Yesterday’s order numbers supported our view, with an increase of 4.2% m/m in December.
After visiting Ukraine’s President Poroshenko yesterday, France’s President Hollande and Germany’s chancellor Merkel will meet Russia’s President Putin today, to discuss a new peace plan to end fighting in Ukraine.
Rates
German yields opened sharply lower yesterday, mirroring earlier moves in the US and Greek worries, but spent most of the day grinding higher again. The 10-year yield finished the day unchanged. There are some initial signs of support starting to be formed around current levels.
Greek concerns pushed intra-Euro-area spreads clearly wider yesterday morning, but the moves were largely reversed later in the day. The Greek 10-year yield still ended the day only slightly higher at 9.69%, and is far from close to the recent highs of above 11%. Volatility will no doubt continue to be large in Greek markets, but the news flow needs to become increasingly bad for the topic to drive broader markets to a notable extent.
US yields continued to climb after the fall the day before, suggesting the recent weakening in economic data momentum is starting to be reflected in the current low yield levels already. However, weak payrolls numbers today still have the potential to push yields lower.
FX
It’s a wait and see game ahead of today’s all-important US job report. Dollar bulls have had little to cheer about this week, and the support the euro enjoyed on the back of the Greek situation early in the week has evaporated quickly. The dollar would need not only a strong payroll number (closer to 250k than to 200k) but also a jump in average earnings for EUR/USD to challenge this week’s low at 1.1280. If not, expect EUR/USD to end the week around this week’s high of 1.1530.
Sterling is well underpinned. Strong housing prices added to the positive sentiment Thursday after a strong PMI reading lifted sterling early in the week. Status quo from the BoE yesterday was a non-event and focus turns to releases of retail sales and industrial production next week. EUR/GBP is back below 0.7500, but a serious test of January’s low at 0.7400 today or next week will be difficult without renewed euro weakness.
The SEK did not benefit much from better-than-expected industrial production data, which is another sign that the SEK will struggle to put in a strong performance ahead of the Riksbank’s rate meeting next week. There will only be a release of unemployment data before the rate announcement next Thursday.
The NOK is weathering the volatility of oil prices quite well as yesterdays temporary swoon in the oil price did not spill over to a weaker NOK. Around 8.60, EUR/NOK is at a low since early last December. Today’s release of industrial production data might not leave any big mark on the NOK. Inflation numbers next Tuesday and GDP data Wednesday will be much more important for the NOK.
Nordea