The apparent campaign by Fed officials to calm market fears that its operational flexibility was going to choke growth was having the desired effect. The implied yield of the December Fed funds futures contract was easing for the second session after jumping by more than 25 bp in the previous five-session slide.
Tech earnings from Alphabet (NASDAQ:GOOGL), Meta Platforms (NASDAQ:FB), Snap (NYSE:SNAP), Pinterest (NYSE:PINS) and Advanced Micro Devices (NASDAQ:AMD) was helping extend the dramatic recovery in the NASDAQ, where the futures contract was up another 1% today.
Most Asian centers were still on holiday, but those markets that were open were all up over 1%, including Japan, Australia, India, Singapore, and New Zealand. Europe's Stoxx 600 was posting its third day of gains, led today by information technology and financials.
The 10-year US Treasury yield was firm a little below 1.80%, ahead of the quarterly refunding announcement later today. European bond yields edged higher after the eurozone's upside CPI surprise.
The dollar was softer against the major currencies. The Scandis were leading, while the Canadian and New Zealand dollars are lagging. Emerging market currencies were more mixed. Turkey and South Africa were heavier, but the Russian ruble continued to recover. It was higher for the fifth consecutive session and gained around 5% over that span, leaving it about 2% lower on the year. The JP Morgan Emerging Market Currency Index was slightly higher after gaining around 1.2% over the past two sessions.
Gold was little changed. It needed to resurface above the $1808-$1810 area to be of note. Oil prices remained firm, with the March WTI contract knocking on $89 ahead of the OPEC+ decision, and after API estimated a 1.65 mln barrel decline in US oil stocks, according to reports. US natural gas prices were fully recouping yesterday's 2.5% decline, while Europe's benchmark steadied after falling nearly 19% over the past two sessions. Copper was lower for the third session.
Asia Pacific
There are days in which Japan's 10-year benchmark bond does not trade, but the JGB market was being closely watched now. Yields were slowly creeping up, largely as a function of higher global rates. Some observers expected it to step up its bond buying at today's operations, but it did not. Still, some are not deterred and warn that the BOJ could conduct unscheduled bond-buying if yields continued to rise.
Yield-curve control aims to keep the 10-year yield within 25 bp of the zero. It was being encouraged by the IMF to target a shorter maturity. Japan's five-year yield was flirting with zero for the first time since the negative rate policy was adopted in January 2016. In our discussions with BOJ officials, we were left with the impression that they would not stand in the way of a global adjustment of rates. Recall that in April, last year's drop in mobile phone charges will no longer be in the 12-month measure of CPI, which will lift the headline and core rates.
News that Q4 unemployment slipped in New Zealand to its lowest level since 1986 (3.2% vs. 3.3%) underpinned expectations for another rate hike at the meeting later this month. Recall New Zealand lifted its cash target rate in October and November by 25 bp to 0.75%. The swaps market saw the RBNZ as the most hawkish central bank this year with nearly 175 bp of tightening priced in over the next 12 months. Most of it (110 bp) was expected in the next six months. The market saw about a 1-in-5 chance of a 50 bp move at its Feb. 23 meeting.
The dollar was approaching important support against the Japanese yen near JPY114.30. It represented a (61.8%) retracement of the greenback's gains last week that took it from about JPY113.50 to almost JPY115.70. There may be some support around JPY114.00 but the risk was a return to the JPY113.50 area especially if US yields eased on what was expected to be a soft ADP jobs estimate. The dollar was unable to resurface above JPY115.00 today, where a $825 mln option expires. Tomorrow there are about $1.9 bln of options in the JPY114.90-JPY115.00 that roll-off.
After approaching three standard deviations from its 20-day moving average at the end of last week, the Australian dollar has bounced by this week. It approached $0.7150 after the pre-weekend low slightly below $0.6970. The $0.7160 area, which held the (61.8%) retracement of the leg down from the Jan. 22 high (~$0.7280) and the 20-day moving average may offer a nearby cap.
The offshore Chinese yuan was enjoying a slightly firmer bias. The US dollar was near CNH6.3640. Recall ahead of the holiday that has shut mainland markets, the greenback settled near CNH6.3680.
Europe
Eurozone inflation surprised the market. Rather than fall from 5.0% to 4.4% as the median (Bloomberg survey) projected, it rose to 5.1% a new high. The monthly increase was 0.3%. The market looked for a 0.4% decline. However, this seemed to partly reflect energy prices.
The core measures eased to 2.3% from 2.6%, which is not quite as much as expected. Although the euro traded higher on the headline; the swaps market turned relatively hawkish on the ECB. It was already pricing 35 bp of higher rates over the next 12 months. And the first hike was fully discounted by late Q3 or early Q4. The ECB meets tomorrow.
The German two-year yield rose 17 bp in the day jump that may be snapped today. The yield was slightly softer today, after the CPI report, in what could be a case of sell the rumor buy the fact. Similarly, the 10-year yield rose from almost minus 0.11% on Jan. 24 to almost 0.04% yesterday, its highest level since May 2019. The yield was a basis point lower on the day near 0.025%.
The euro was extending its recovery after forging a base near $1.1120 are the end of last week and the start of this week. The unexpected rise in the eurozone CPI lifted the single currency to around $1.1315, meeting the (50%) retracement objective of the slide from mid-January's high near $1.1485. The next retracement (61.8%) was around $1.1345. The Bank of England meets tomorrow too, and the market expected a hawkish hike.
Sterling was also extending its recovery from last week's low near $1.3360. It approached the (50%) retracement objective of the move lower since the middle of last month, which was found near $1.3555 and the 20-day moving average. The next target was $1.3600.
America
There was a wide dispersion of forecasts for the January non-farm payrolls out on Friday. The responses in the Bloomberg survey ranged from -400k to up 250k. The average was a little less than 90k and the median was 150k. ADP gives us its estimate of the change in private sector jobs. The median in the Bloomberg survey was for 184k down from 807k. The ADP does not provide much illumination in the short run.
In Q4 21, ADP's three-month average was 625k, while the official private sector job growth averaged a little less than 400k. However, for the entire year, the two timeseries were as tight as could be expected. Pending revision to the December data, the BLS estimated an average increase of 500k private sector jobs a month, while the ADP estimated a 514k average.
More Fed officials have been speaking, and no one seemed to be endorsing a 50 bp increase in March. This was even true of the hawk Bullard, who appeared inclined for five hikes this year. Recall that in December, there were two dots (Fed views) pointing to 125 bp increase in rates this year. The December Fed funds futures had four hikes fully discounted and an 80% chance of the fifth. Yesterday, the implied yield of the contract fell for the first time since the FOMC meeting began last Tuesday. Through Monday, it had risen 28 bp.
News that Lujan, a Democratic Senator from New Mexico suffered a stroke, requiring surgery, was a personal tragedy with political implications. His absence left 49 Senators in the Democratic caucus. This seemed to strike party-line voting—legislation as confirmations. This also included the China bill that also looked to aid the US chip industry. The GOP was pushing back on grounds that it was too easy on Beijing. There was also a bill looking to specify sanctions on Russia if it invades Ukraine. The White House appeared to be pushing against it, preferring to retain some strategic ambiguity to ostensibly strengthen deterrence.
The Canadian dollar was trading quietly in a narrow range around yesterday's settlement (~CAD1.2685). The greenback traded down to around CAD1.2655 yesterday but the downside momentum eased. Nearby support was seen in the CAD1.2625 area, which housed (50%) retracement objective of the US dollar's bounce in the second half of January and the 20-day moving average.
The greenback was extending this week's losses against the Mexican peso. The break of the MXN20.52 area could spur an initial move toward MXN20.40.
Brazil's central bank pre-committed to hiking the Selic rate by 150 bp to 10.75% later today. Its forward guidance was arguably more important than the widely expected hike. With inflation falling for the past two months, ideas that the tightening cycle was almost complete encouraged flows into the Brazilian assets. The Brazilian real appreciated by almost 5.9% this year coming into today, second only to the nearly 6.1% gain of the Chilean peso. Yesterday, the dollar fell to about BRL5.2650, its lowest level since last September. The next area of chart support was seen around BRL5.20.
