A Solid Labour Market Report Should Help Put a Floor for Core (US and European) Bond Yields

Markets

The market focus shifted yesterday from softer than expected EMU inflation (and a broader cooling of inflation expectations) to US (labour market/activity) data. After solid JOLTS job opening published on Wednesday, ADP private job growth (235k from an upwardly revised 182k, vs 150k expected) and US jobless claims (better than expected both for the weekly & continuing series) reinforced the view that a persistently tight labour market is at risk of causing sustained upward wage drift, annex underlying inflation. Fed speakers returned from their New Year holiday break. Ester George again challenged market positioning as she guided Fed rates to stay above 5% well into 2024. Atlanta Fed Chair Bostic repeated there is still much work to do. Yields jumped after the strong labour data but gains partially faded later. US rates finished between 10.4 (2-y) and 0.4 bps (30-y) higher, resuming the inversion dynamics. German yields gained between 7.2 bps (2-y) and 4.1 bps (30-y). ECB’s Villeroy indicated the ECB should complete its hiking cycle by summer and to then hold rates at that level for a longer period of time. Even as the French ECB member repeated that it’s too early to anticipate at what level rates will peak, such an approach might fit with a scenario of the ECB raising rates 50 bps at the two upcoming meetings, to finish the cycle near 3.50%. The ‘end’ of the first 2023 bond market upleg also hurt equities. US indices ceded up to 1.47% (Nasdaq). The EuroStoxx 50 lost 0.36%. Oil (brent $ 78.8/b) and the Dutch gas future (two pointers of receding energy inflation of late) show tentative signs of bottoming. Strong US labour data, higher yields and a receding risk optimism again put the dollar in pole position. The US DXY index jumped from the 104 area to close at 105.04. EUR/USD dropped from 1.06+ levels to close at a 2023 low (1.0522). USD/JPY also extended its rebound (close 133.41 vs sub 130 levels early this week).

Today’s calendar is well filled with the EMU December CPI, EC confidence data, US payrolls and the services ISM. EMU inflation will substantially ease from last month’s 10.1% level, but this shouldn’t come as a surprise after the softer data from EMU members states. We continue to keep a close eye at the core reading which is expected to hold near (or above) 5.0%. For the payrolls, markets expect another 200k+ net job gain. From a monetary policy point of view, wage growth (AHE expected at 0.4% M/M and 5.0% Y/Y) will continue to print at a level that is much too high for the Fed to conclude that inflation will move to target in the foreseeable future. A solid labour market report should help to put a floor for core (US and European) bond yields. It also should facilitate a further comeback of the USD. EUR/USD 1.0452 (23% Retracement from Sept/Dec rise) is first reference on the charts.

New Headlines

Rumours that China was preparing additional support for the vast property sector gained more substance after people familiar with the matter told Bloomberg that the country is planning to relax the so-called “three red lines”. Under that regime, introduced in 2020, developers wanting to refinance needed to meet three key thresholds as the Chinese government sought to deleverage the sector, lower risks in the financial sector and make homes more affordable. Beijing now mulling relaxations to the rules, including easing borrowing caps and push back the grace period for meeting the targets, is seen as a major policy shift. The Chinese yuan rallies this morning from USD/CNY 6.88 to 6.855 currently. The offshore yuan (USD/CNH 6.859) broke below the 200dMA with next resistance kicking in at 6.838 (May USD/CNH interim high).

Nominal Japanese wages grew 0.5% in November, down from 1.4% the previous month, the labor ministry reported. Real wages fell a more-than-expected 3.8% y/y, the most since 2014. The decline was driven by a sharp drop in bonusses though. Basic salaries remained broadly stable. It nevertheless suggests that wage growth has still some ground to cover before the Bank of Japan considers it enough for sustainable (2%) inflation. Its governor, Kuroda, previously indicated that they needed to grew around 3%. This year’s spring wage negotiations are seen as critical for any BoJ policy rate hikes, meaning that changes are likely to happen after Kuroda’s term ends in April. The Japanese yen is under pressure this morning, underperforming G10 peers. USD/JPY advances from 133.41 to 134.12.