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The “end” of the first bond market rally of 2023 also hurt stocks



Yesterday, the market’s focus shifted from weaker-than-expected inflation in EMU (and a broader cooling in inflation expectations) to US data (labour market/activity). After a strong JOLTS Job Opening released Wednesday, ADP private job growth (235,000 of an upward-revised 182,000, vs. 150,000 expected) and U.S. jobless claims (better than planned for both the weekly series and the continuing series) have reinforced the view that a persistently tight labor market is likely to cause a sustained upward wage drift, schedule underlying inflation. Fed speakers returned from their New Years vacation. Ester George again challenged market positioning by guiding Fed rates to remain above 5% through 2024. The chairman of the Atlanta Fed, Bostic, repeated that there was still a lot of work to be done. Yields jumped after the good labor data, but the gains partially faded later. US yields ended between 10.4 (2 years) and 0.4 bps (30 years) higher, resuming the reversal momentum. German rates gained between 7.2 bp (2 years) and 4.1 bp (30 years). Villeroy of the ECB indicated that the ECB should end its hike cycle by the summer and then keep rates at this level for a longer period. Although the French member of the ECB reiterated that it is too early to anticipate at what level rates will peak, such an approach could be part of a scenario where the ECB would raise rates by 50 basis points in the next two meetings, to complete the cycle nearly 3.50%. The “end” of the first bond market rally of 2023 also hurt stocks. US indices fell as much as 1.47% (Nasdaq). The EuroStoxx 50 lost 0.36%. Oil (brent $78.8/bbl) and Dutch gas futures (both pointers to falling energy inflation lately) are showing tentative signs of bottoming out. Strong U.S. jobs data, higher yields and declining optimism for risk have once again the dollar in pole position. The US DXY index jumped from the 104 zone to close at 105.04. EUR/USD fell from 1.06+ levels to close at a 2023 low (1.0522). USD/JPY also extended its rebound (close to 133.41 from levels below 130 at the start of the week).

Today the calendar is full with the EMU December CPI, EC confidence data, US payroll and services ISM. EMU inflation will come down significantly from last month’s 10.1% level, but that should come as no surprise after weaker data from EMU member states. We continue to monitor closely basic reading which should remain near (or above) 5.0%. For payslips, markets are expecting another net job gain of over 200,000. From a monetary policy perspective, wage growth (AHE expected at 0.4% M/M and 5.0% Y/Y) will continue to print far too high for the Fed to conclude that inflation will move toward target for the foreseeable future . A strong labor market report should help set a floor for core bond yields (US and European). It should also facilitate a further USD comeback. EUR/USD 1.0452 (23% retracement from the September/December rally) is the first benchmark on the charts.

News headlines

Rumors that China was preparing additional support for the vast real estate sector gained substance after people familiar with the matter told Bloomberg the country plans to relax the so-called “three red lines”. Under the scheme, introduced in 2020, developers wishing to refinance had to meet three key thresholds as the Chinese government sought to deleverage the sector, reduce risk in the financial sector and make housing more affordable. Beijing is now considering easing the rules, including easing borrowing limits and pushing back the grace period to meet targets, is considered a major policy change. The Chinese yuan rebounded this morning from 6.88 USD/CNY to 6.855 currently. The Offshore Yuan (USD/CNH 6.859) broke through the 200dMA with next resistance at 6.838 (USD/CNH May intermediate high).

Japanese nominal wages rose 0.5% in November, down from 1.4% the previous month, the Labor Department reported. Real wages fell 3.8% year-on-year more than expected, the highest since 2014. The decline, however, was driven by a sharp decline in premiums. Base salaries remained broadly stable. It nevertheless suggests that wage growth still has some way to go before the Bank of Japan considers it sufficient for sustained inflation (2%). Its governor, Kuroda previously indicated that they should grow by around 3%. This year’s spring wage talks are seen as key to any BoJ rate hikes, meaning changes are likely to occur after Kuroda’s term ends in April. The Japanese Yen is under pressure this morning, underperforming its G10 peers. USD/JPY rises from 133.41 to 134.12.

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