German 2-Year Yield Rises to Six-Year Highs

Overview: From the pre-weekend low to yesterday’s high, the NASDAQ rallied around 7.5% and is trading a little firmer ahead of the US open.  Bottom-pickers emerged after the tech-heavy benchmark slid about 20% from its record high late last year.  At the same time, a chorus of Fed officials have underscored Chair Powell’s message that while a March rate hike is in the cards, there is no forward guidance.  All options are open but there is no desire to surprise the market (see BOE last November).  Many Asian centers remain on holiday, but Japan, Australia, New Zealand, and India all advanced.  Europe’s Stoxx 600, with a four-week loss in tow, is up about 1% near midday in Europe, led by industrials and information technology.  Benchmark 10-year yields are around 1-2 bp softer in Europe and the US.  It puts the 10-year Treasury yield around 1.76%.  The dollar is trading off, extending yesterday’s move.  The major foreign currencies are up 0.25%-0.50%, led by the Scandis and Swiss franc with the euro as a laggard.  Emerging markets are led by the freely accessible currencies like the South African rand, Russian rouble, and Mexican peso.  The JP Morgan Emerging Market Currency Index is pushing higher after rising over 1% yesterday, the most since before Xmas.  Gold is testing the 200-day moving average near $1806.  It’s low from the end of last week was around $1780.  The next technical target is in the $1817-$1825 area.  March WTI is stalling ahead of last week’s high (~$88.75).  A break of $85 could signal a correction instead of consolidation.  US natural gas is paring yesterday’s 5% gain, while Europe’s benchmark is falling another 8% after a slide of similar magnitude yesterday.   Copper is trading with a firmer bias.  The CRB Index has advanced for the past six consecutive weeks for a nearly 12.5% gain.  It rose nearly 1% yesterday.  

Asia Pacific

The Reserve Bank of Australia will end its A$4 bln a week bond purchases, but Governor Lowe did not moderate his rhetoric as expected to allow for a sooner rate increase.  This sparked a brief wobble in the currency and rates, but market expectations did not change much.  The swaps market is pricing in about 110 bp of rate increase over the next year and 25 bp is fully discounted by early H2.  Other data today were weaker than expected.  The flash January manufacturing PMI was shaved to 55.1 from 55.3 and 57.7 in December.  December retail sales slumped 4.4% rather than the 2% expected after surging 7.3% in November.  

After a series of disappointed reports at the end of last week, including December industrial production and retail sales, Japan’s data surprised on the upside today.  The January manufacturing PMI stands at 55.4 not the flash reading’s 54.6 (54.3 in December).  Unemployment unexpectedly slipped lower in December to 2.7% from 2.8%, while the job-to-applicant ticked up to 1.16 from 1.15. Lastly, we note that that the lower house of the Diet passed a resolution today on the eve of the Beijing Olympics, critical of China’s human rights and especially its treatment of Uyghurs.  

South Korea’s January trade deficit was more than twice as large as expected at $4.9 bln, a new record.  Last January, it reported a $3.6 bln surplus.  Exports were weaker than expected rising 15.2% year-over-year, down from 18.3% in December.  Imports were also stronger than expected.  They were 35.5% higher than a year ago.  Economists had projected them slowing below 30%.  

The dollar is a three-day low against the Japanese yen near JPY114.70.  It has nearly retraced half of last week’s recovery that lifted it from around JPY113.50 to JPY115.70.  The next (61.8%) retracement is near JPY114.30.  We suspect the dollar can stabilize and recover a bit in the North American session.  The Australian dollar initially fell to about $0.7035 on the RBA’s stance, but quickly regained its composure and made new session highs around $0.7090 in late Asian dealings. It is approaching resistance in the $0.7100-$0.7120 area.  The US dollar is consolidating within yesterday’s range against the offshore yuan.  It is little changed around CNH6.37. 


There is a significant adjustment taking place that appears to be supporting the euro.  The US 2-year premium over Germany is narrowing for the third consecutive session. It reached 181 bp last week and is now near 167 bp.  It is the largest decline in two months.  It is largely the function of the backing up of German rates.  The German 2-year yield is rising for its sixth consecutive session.  During this run, the yield has fallen by about 16 bp to minus 0.46%.  It is the highest yield in almost six years.  The market is pricing in about a 30 bp hike from the ECB over the next 12-months. It looks like the first move is expected later this year.  The ECB meets on Thursday.  

The eurozone flash manufacturing PMI of 59.0 was trimmed to 58.7 after 58.0 in December.  A downward revision to Germany’s reading (59.8 vs. 60.5) and a disappointing Italian report (58.3 vs. 62.0) were responsible.  France’s stood at 55.5 unchanged from the flash report (55.6 in December).  Spain’s defied expectations of a pullback and was steady at 56.2.

Other data were mixed.  France, like Germany yesterday, reported firmer than expected January CPI.  It rose by a minor 0.1%, but the market had expected a 0.2% decline.  The year-over-year rate edged up to 3.3% from 2.9%.  German retail sales collapsed in December, falling 5.5% on the month.  It was about four-times larger than expected.  On the other hand, the unemployment queues fell by 48k in January, the largest decline since last August.  The unemployment rate unexpectedly eased to 5.1% from 5.2%.  Italy’s December unemployment rate fell to 9.0% from a revised 9.1% in November.  Recall that it was at 9.9% at the end of 2019.  For the eurozone as a whole, the unemployment rate in December stood at 7.0%, the eighth consecutive decline.  It was at 7.5% before the pandemic. 

The UK reported stronger January house prices (Nationwide), and more mortgage approvals and stronger consumer credit growth in December.  The manufacturing PMI was revised to 57.3 from 56.9, but it still fell for the second month (57.9 in December.  It is the lowest since last February.  The UK government is taking several new initiatives to show that it is not paralyzed by the Gray’s report or the pending police investigation.  It has begun a two-week consultation period to scrap mandatory vaccines for frontline NHS workers.  We note that Finland is also lowering its assessment of the Covid threat, including eliminating the virus pass and social restrictions.  The Johnson government is also considering committing more soldiers and equipment to NATO.  

The euro is firm near $1.1265. It has met the (38.2%) retracement of the leg down from the peak on January 14 just shy of $1.1485.  The next retracement (50%) is around $1.1300, where a 1.55 bln euro option expires today.  Support now is seen in the $1.1220-$1.1240 area.  Sterling’s is pushing above $1.35 and is approaching its (38.2%) retracement objective slightly above $1.3505.  The next (50%) retracement is near $1.3555, around the 20-day moving average.  Sterling bottomed last week by $1.3560.  The gains in the European morning have stretched the intraday momentum indicator, suggesting North American dealers may have a difficult time extending the upticks much.,  


It is almost as if the Fed orchestrated an effort to calm the rate hike expectations.  Recall many have revised higher, some to seven, hikes this year.  The flattening of the yield curve may have also gotten some official attention.  Bostic, Barkin, and Daly all seemed to be reading from the same general script.  The White House may have also gotten into the act with a press briefing yesterday that noted that in the week of the jobs survey, nine million workers had called in sick or taking care of a sick family member.  That said, we note that the implied yield of the December Fed funds futures contract has risen for the last five sessions and is trading a little firmer now. 

Outside of the JOLT report on job openings and December construction spending, today’s US data is primarily from the private sector.  Markit’s final manufacturing PMI is expected to be little changed from the 55.0 flash reading, which was the lowest since before the 2020 election.  The ISM manufacturing reading is expected to fall to around 57.5.  It would also be the lowest since November 2020 and would the third consecutive decline.  Prices paid are expected to have fallen for the third consecutive month.  The median forecast in the Bloomberg survey looks for 67.0 after peaking last June at 92.1.  Finally, are the US auto sales figures.  A modest gain to almost 13 mln (seasonally adjusted annual rate) is expected.  In January 2021, the pace was 16.6 mln.  

Canada reports November GDP (Bloomberg median 0.4% for 3.6% year-over-year pace) and the Markit manufacturing PMI.  The employment data at the of the week is more important for the markets, but a Bank of Canada rate hike next month is baked in the cake.  Mexico reported its economy contracted in Q4 (by 0.1%) but it was the second consecutive quarterly decline in output.  The swaps market still has 100 bp of tightening priced in over the next three months.  Today, Mexico reports worker remittances (strong) and Markit’s manufacturing PMI and IMEF activity indices.  Brazil sees the Markit PMI and January trade figures (a small deficit is expected).  The central bank meets tomorrow and has pre-committed to a 150 bp hike.  It was the most aggressive last year and is perceived to be near a peak, which appears have encouraged foreign flows into the bond and stock markets.  

The US dollar is correcting lower against the Canadian dollar rallying 1.5% last week.  It met the (38.2%) retracement objective near CAD1.2665 today and the next (50%) is near CAD1.2625.  There is an option for about $570 mln tat CAD1.2705 that will be cut today.  A move above CAD1.2720 could suggest the correction is over.  The greenback’s pullback against the Mexican peso has been deeper.  It is approaching the (61.8%) retracement objective near MXN20.52.  The 20-day moving average is a little lower (~MXN20.5080).  Resistance now is pegged around MN20.65. 



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