Eco data were few yesterday and the outcome only gave limited directional guidance for global trading. German IFO business confidence (business climate rising from 88.6 to 90.2; expectations gaining from 83.2 to 86.4) confirmed the message from Tuesday’s PMI’s. A recession will probably be avoided and prospects for later this year are better than a few months ago. European bonds found a bid during the morning session, but the move had no strong legs and yields reversed most of the decline in US trading. At the end of the day, German yields closed little changed (-1.5 bps 2-y; +1.6 bps 30-y). Last ECB speakers before the blackout period reiterated the case for two additional 50 bps hikes in at least February and March. US yields eased between 3 bps (5-y) and 1.1 bp (30-y). The decline in the 2-yield was mainly due to a benchmark change. The $43bn 5-y Note auction met with very strong investor demand, reinforcing a late session bond rebound. Equities again showed resilience, with both US indices and European indices almost fully reversing intraday losses (S&P -0.02%, EuroStoxx 50 -0.12%). The dollar continues its gradual/protracted retreat. DYX closed at 101.64 (from 102). EUR/USD finished north of the 1.09 big figure (1.0916). EUR/GBP slipped back to close just above 0.88, despite UK Gilts’ outperformance. Oil traded little changed near $86/b.
Asian equities mostly keep a positive tone this morning. Yields on US Treasuries are little changed. The dollar holds near recent lows (DXY 101.60, EUR/USD 1.091, USD/JPY 129.35). Later today, US Q4 GDP is expected show growth of 2.6% Q/Qa while price deflators are expected to ease substantially (core 3.9% from 4.4%). GDP data are old news. Even so, some kind of goldilocks scenario of decent growth and easing price pressure might sustain the ST resilience of equities, soft yields and a weaker dollar. US durable goods orders and jobless claims also deserve some attention. The US 10-y yield struggles to stay above the 3.4% support area. The German 10-y yield meets first resistance near 2.2%. EUR/USD is heading for 1.0942 (50% retracement 2021/22). Major technical breaks are not evident as investors await guidance from next weeks Fed, ECB and BoE policy meetings.
News and views
The Bank of Canada raised the policy rate yesterday by 25 bps to 4.5%. Provided the economy and inflation evolves in line with the outlook, the BoC expects it to hold it there. Growth has been more resilient and the economy remains in excess demand. GDP is expected to expand about 1% this year and 2% in the next, little changed from the October forecast. However, restrictive monetary policy is filtering through, especially in household spending and the housing market. The overall activity slowdown will allow supply to catch up with demand. Inflation declined to 6.3% in December on lower gasoline prices and moderating prices for durable goods. 3-month measures of core inflation have come down, suggesting that it has peaked. CPI is projected to come down to around 3% in the middle of this year and back to the 2% target in 2024. The BoC’s pause announcement came as no major surprise. Markets were pricing in a 4.5% terminal rate for some time now. It nevertheless triggered Canadian yield losses between 4.9-7.7 bps with the front outperforming. Canadian money markets expects 50 bps rate cuts by the end of this year. The loonie lost ground in a kneejerk reaction before paring losses to USD/CAD 1.3392 (from 1.3369).
Growth in South Korea contracted in Q4 of 2022 by 0.4% q/q. That brought the yearly figure to 1.4%, down from 3.1% in Q3. The first decline in two and a half years was mainly due to a crash in exports (-5.8% q/q), more than offsetting a 4.8% import decline. Household consumption, a key driver for growth for most of last year, also dropped (-0.4%). Government spending offered some counterweight (+3.2%). SK’s finance minister Choo Kyung-ho already pledged strong support for exporters such as tax breaks and administrative help. This may complicate the central bank’s task. Although the BoK itself kept all options open, its rate hike earlier this month to 3.5% was seen as the final one this cycle. The South Korean won reacted stoic to the data. USD/KRW is trading near recent lows of 1231.