Macro outlook
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Global Markets: Big Moves in bond markets overnight – the run of soft data in the US is being taken at face value by investors – bad news finally equals bad news. Stocks had a bad day, with the S&P500 and NASDAQ both losing between 1 and a quarter and one and a half per cent on the day, but it is the moves in US treasury yields that most catch the eye. 2Y US Treasury yields fell 12.2bp, to 4.082%, while the 10Y bond saw yields down 17.8bp to 3.37%, which has helped drag bond yields elsewhere down too. The Australian 10Y now yields 3.43%, which is down more than 60bp from the start of the year. Japan’s 10Y JGB is now yielding only 0.402% after investors were chastened by Kuroda’s blunt rejection of further changes to the BoJ’s policy stance. It did look at one point as if these weaker yields would drive EURUSD to new year highs, and for a while they did, reaching up to 1.0887, but the rise was short-lived, and EURUSD is now back to just below 1.08. The AUD had a similar gain and then reversal, as did Cable, though it managed to hold on to more of its earlier gains to trade at 1.2345 currently. The JPY did almost the opposite, selling off up to 131.50 after the BoJ meeting, only to recover back to 128.43. Asian FX had a mostly positive day yesterday, led by the THB, INR, IDR and PHP.
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G-7 Macro: December US advance retail sales came in even weaker than expected, dropping 1.1% MoM, with downward revisions to previous months’ data. PPI inflation data also fell sharply from the previous month, and there was a nasty fall of 0.7% MoM from industrial production. James Knightley has written about this data plus what it may mean for the Fed. It’s well worth the read – it even questions whether the Fed will raise further after February. The Fed’s Beige book also noted that the rate of price increases was moderating in many districts with contacts expecting further moderation in the year ahead. In spite of this, James Bullard and Loretta Mester kept up the hawkish commentary – not that it seems anyone in the markets is listening. Today, we get US housing starts and permits. Housing starts have been on the slide since April last year, though these winter readings need to be taken with a pinch of salt as they are prone to seasonal anomalies. UK RICS house price balance is also released for December today and is expected to show further declines.
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Australia: The December labour report contains a lot of interesting data. The headline figure of a 14,600 decline in total employment is the most eye-grabbing detail, though it was mainly a result of part-time job losses (-32,200), and full-time jobs still grew a respectable 17,600, though slower than in November. And there was a higher-than-expected unemployment rate of 3.5% up from 3.4%. Together, these data mean that we will stick to our 3.6% peak cash rate call, despite the inflation disappointment last month. More inflation data is released next week, which we hope will restart inflation's move lower.
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Indonesia: Bank Indonesia meets to discuss policy today. The central bank is widely expected to hike rates at today’s policy meeting to steady the IDR and to quell still-potent price pressures. Inflation unexpectedly flared up last December with BI Governor Warjiyo warning that inflation could remain elevated this year. BI will continue to monitor inflation developments and the performance of the currency. However, we could see the central bank eventually pause after Governor Warjiyo voiced some concerns about the economy’s growth trajectory in 2023.
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