The stock markets ended around 0.3% down on Friday, as the Fed reprising took place after the great jobs report: now the market prices in the first hike in September rather than October. The tone was carried over to Asia tonight.
Friday’s US labour market report makes it harder for the Fed to justify close to zero interest rates for much longer. We recently postponed the expected first Fed hike from June to September, but the strength of the labour market implies that the Fed might choose to drop its “patience” guidance as early as at the next FOMC meeting in March, opening the door for a June hike. Now the focus turns to Fed speeches and Chair Yellen’s semi-annual monetary policy testimony to Congress on February 24th.
German industrial production rose a weaker-than-expected 0.1% m/m in December. Forward-looking indicators, however, point to more momentum in coming months.
In China exports and imports both disappointed, as the trade balance has widened. The January data should be taken with the pinch of salt: the drop could be blamed for seasonality, commodity price changes and mis-invoicing.
Day and week ahead
It is a very quiet start to the week today with no major data releases or events. Officials from the G20 nations meet in Turkey today and tomorrow, but if history is any guide it will be a non-event for financial markets.
Things pick up a bit a few hours after midnight when Chinese CPI data will be released. We expect another soft reading. Sometime this week Chinese lending data will be also released.
Tomorrow also brings the US NFIB small business survey and the Job Opening and Labor Turnover Survey (JOLTS). Both provide important parts of the Fed’s labour market assessments. In Norway and Denmark CPI reports are due.
On Tuesday, Norway will report the CPI: expect core inflation to decline to 2.3% y/y despite the weaker NOK (still more than the Norges Bank projects: 2.2% y/y).
On Thursday US retail sales are released and the Bank of England’s Inflation Report will see the light. The Riksbank is expected to leave the repo rate unchanged, but the central bank will likely emphasise that it is ready to take further action if necessary.
Rates
The +29K surprise in Friday’s non-farm payrolls (naturally) gave way to a sell-off in US bonds and 10Y treasury yields increased by 16 bp. This means that we have now rebounded by more than 30 bp since the bottom on 30 January but we’re still way short (about 25 bp) of the levels that started the year. The boost to average hourly earnings lifted 5Y5Y breakeven US inflation by 7 bp.
On the EUR side rates receded until the positive NFP number and ended the day a bit higher. With Bunds around 38 bp on Friday a slight rebound over the week was realised. The global low for the 10Y German bond is just below 0.3% on 2 February. Swap spreads have tightened over the past week, with the Bund spread now below 34 bp.
On EUR swaps, 30Y swaps are again below 1.20% and it’s worth noting that long real rates are significantly negative. For instance, 20Y swaps at a -0.5% real rate look unsustainable for the longer run. In a scenario where the ECB effect on nominal bond yields starts to wane, these levels look primed to increase.
FX
Dollar optimists have faced setbacks ever since the ECB’s formal QE announcement in January. Last week’s employment data finally provided some tailwinds for the dollar as the market was forced to once more reassess the outlook for the timing of Fed rate hikes. How the Fed communicates the balance between labour market strength and temporarily low inflation will be key for the USD. In this respect survey-based inflation expectations must not deteriorate if the market is to keep on reprising the Fed outlook in a hawkish (and USD-positive) direction.
The NOK has been on a tear recently, strengthening no matter what happens with the oil price (which is up almost 20% in a week!).Inflation numbers on Tuesday and GDP data on Wednesday will be key for the near-term NOK outlook.
The SEK has been under pressure recently as the market is pricing in a very soft Riksbank. Could it be that the Riksbank is worried enough by inflation expectations to launch something substantial on Thursday? After all, easing policies seem to be the new normal of 2015: everyone is doing it. We think calling the outcome is risky business.
Nordea